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Investment Strategy Using Business Tools (BCG Matrix)
This post contains some thoughts and an analysis of the cryptocurrency market under the prism of business strategy.
It is based on business strategy models which can be incorporated into a retail investment strategy for the cryptocurrency market.
I try to interpret cryptocurrency asset research and base also on business portfolio planning, performing a case study with actual business investing models.
I have rarely seen the application of case studies from other markets when examining cryptocurrencies, and I figured there are many similarities we tend to ignore.
I adapt the business strategy investing model of BCG into one that can help the retail investor find an optimal strategy when investing in the cryptocurrency market.
Usually, this kind of analysis is business-related and is performed when a business is trying to figure which part of the market it will be able to perform best. I've taken the part of the business out of this matrix, and only selected the criteria of each section that can be valid for our investment strategy in cryptocurrencies.
The attractiveness of a market is indicating its evolving level. The cryptocurrency market is enjoying huge growth for over one decade and is considered an investment priority by many top funds and corporations. (Gugenheim, Tesla, Microstrategy, etc.). In the business world, a growing market is always guaranteeing profitability to companies and investors.
In a booming market, businesses enjoy increased sales and profits. In crypto, we enjoy increased demand for the underlying asset of blockchain networks.
Since the production of new coins for most blockchains can't be increased but is fixed when demand increases the price of the asset also rises.
For most cryptocurrencies during a hype cycle, demand grows higher than the supply and they can enjoy huge price growth. Some cryptocurrencies (BTC, Ethereum) have created a competitive advantage and are in a dominant position. Also, very often they will abuse this position to try and block other competing cryptocurrencies and try to retain or increase their market influence further.
This is happening in the business world too and is known as "abuse of dominant market position". Market leaders are companies that hold a significant portion of a market and quite often they abuse their dominant position to prevent competition and increase their size. Usually, this is not legal and quite often we read about fines imposed on big corporations like Google and Apple.
The cryptocurrency world is very different to businesses no matter how much governments try to adapt models and put them under regulatory frameworks. Bitcoin and most cryptocurrencies are autonomous networks running under consensus rules where the overwhelming majority of the community decides their future.
The Bitcoin (BTC) community, is trying with PR and marketing to retain and increase its dominance by promoting the narrative it is the only Crypto that matters. Moreover, there are suppression mechanisms and market manipulation against competitors, as well as censorship in the media influenced by the BTC community.
This is market manipulation and abuse of dominant position and is witnessed during the blocksize debate and the Bitcoin split between BTC and BCH. Bitcoin Cash since then has been censored and usually, only bad news appears in 90% of the cryptocurrency media.
It is part of the BTC strategy which increases the flow of capital in Bitcoin-BTC and minimizes competition.
Boom and Bust Bitcoin Cycles:
The cryptocurrency market is often enjoying an extreme growth trend during what is perceived as the bullish cycle (hype cycle).
This cycle is often initiated right after the "halving" event of Bitcoin (BTC). This reduces the new supply of Bitcoins in the market by half. The effect of the halving during its three previous occurrences, was an increase in demand for BTC (mostly for speculative reasons) and a parabolic price growth for about 12-18 months after the halving occurs.
The rest of the cryptocurrencies are also enjoying extremely increased price levels and often reaching bubble levels with very high valuations that are not justified by their fundamentals. It is worth noting that just
Trying to incorporate it into the Crypto market I find the Bitcoin (BTC) strategy to be proceeding by fully utilizing its strategic advantages and minimizing competition. The main strategic advantage of BTC is its brand name, Bitcoin.
The market share is the strength a company has in a market. In cryptocurrency, it is described by the dominance factor of the market cap of each cryptocurrency when compared to the total market cap.
Bitcoin (BTC) is the most dominant cryptocurrency. It ranges between 35-80% in market dominance. It is also the first one since Bitcoin started everything. The brand name "Bitcoin" is the flagship of the cryptocurrency market, it is where everyone begins when entering the CryptoVerse.
The higher the market share the more is the advantages. Bitcoin (BTC) is dominating not just the market cap, but the surrounding entities have a better negotiating ability in the distribution channels. The term distribution channels can be applied in crypto when considering availability in exchanges and trading desks.
The BCG Matrix is mostly about the business sector and it explains the strategy from the side of the business executives.
Part of its analysis is about production cost and financial support requirements. It is restricted to the products of a company. In this sense, it is not even related to cryptocurrencies. I have tried to adapt this chart into crypto-investing since I've found similarities that exist between the total market growth, the market share of each cryptocurrency, and the potential of each crypto-asset.
The two aspects of the BCG Matrix (Market Growth and Market Share) provides us a Matrix with four different categories of assets each having different investing features we need to take into account.
An asset can switch between these different ranks of the BCG Matrix.
These ranks point to certain attributes and can be applied to the crypto market too. Cryptocurrency assets (just as other assets/products) can also change ranks according to the market's pace and reach from "Dog" to "Star", as we've seen recently with the best example that even goes by the name Doge.
Taking into consideration these two aspects of the BCG Matrix we can analyze each rank with consideration to our cryptocurrency investment strategy.
Networks or projects that are growing rapidly and expanding in user-base, adoption, and market cap
Bring huge profits to investors
Investors demands for growth continuation
Usually, these cryptocurrencies will have the highest volumes in exchanges and the top marketing. These networks have managed to attract a large user base and try to grow further and achieve higher adoption. These networks try to reach the higher rank of "cow" and become established, or even market leaders.
Examples: Cardano, Bitcoin Cash, Polkadot, Chainlink, Tron (previously), Litecoin (previously).
While some assets are definitely falling under the "star" rank, there are also many that reached this status in previous years, and lately seem they are going to drop a rank. Tron and Litecoin may not belong in this rank for too long, since they found small support, didn't perform as previously and their communities and development seem to be in decline.
Bitcoin Cash managed to increase in user base but was lagging in mainstream exposure. The media censorship and censorship as part of the BTC strategy (explained above) also suppressed this asset a lot.
This is about assets that have potential but can either reach star status or dog according to how the decision-making process moves forward.
In businesses, these are products that require too much support to succeed. Marketing and development. Also in business terms, this area means lower profit margins and bigger investment. But when talking about retail investing in cryptocurrencies it gets difficult to know if there is potential or not.
Usually, we see many cryptocurrencies skyrocket in just a few months inside an altcoin season. Most of those will be values that do not represent technology, development, user base, and usage of their networks. Quite often we will see ERC20 tokens reach extremely high valuations while the expectations are not reasoning this.
While these assets can be advertised a lot and meet sudden high demand, the opposite will happen after a while, and they will meet their price dropping as quickly as it was rising.
I could think of many cryptocurrencies that switched between ranks and still are a question mark. IOTA, Enjin, Matic, Stellar, XRP, EOS, NEO are some of those that were used to be seen as top technology that would dominate the crypto and financial world, however, they kept lagging behind new developments and are constantly losing dominance and popularity.
Meanwhile many DeFi projects that appeared recently have a very good opportunity to reach to a higher rank and become established assets. MakerDAO, Aave, Compound are some examples.
This is probably 90% of the cryptocurrencies. There are thousands on this list and most of them will become completely obsolete. The cost of running a coin/token may be so low that it will always be running and have some kind of very low value. But, in the case of coins that are not us
Very low growth capabilities
Mostly abandoned tokens and blockchains that don't connect to a node
Still trading in smaller exchanges
Scams and cash-grabs
However there are many that have potential and as we've seen from Dogecoin which was completely forgotten, they've managed to grow ranks from being abandoned by the devs and forgotten to reach very high popularity.
Most of these coins are targeting niche opportunities and try to differentiate, like the meme coins, and due to hype can bring temporarily very good results.
But for long-term investing it is always a huge gamble to include coins as Doge or Shiba Inu in a portfolio.
All these coins will manage one or multiple pump and dumps and are extremely speculative.
Usually, this section is coins that devs will try to push using marketing for a very short time. They will fail and become abandoned in a very short time. To be avoided for long-term investment as these cryptocurrencies are an analog of penny stocks.
I hope I didn't commit a major mistake by trying to mix business strategy with retail investing. It could be an error, but I tried to bring this topic with an aim of combining long-term investing with a ranking of the crypto assets.
While BTC is currently the dominant cryptocurrency, Ethereum during this run also validated its dominant position as the second one. This is a very positive fact for the crypto market and should be seen as such. Competition is important and BTC maximalism is falling apart.
The main problem with Crypto investing is that during a bear market most assets will lose 80-99% of their value. Assets will also change between these ranks very fast. In a matter of one year, one crypto asset may not be looking as promising as it was previously. Litecoin and Dash are an example of Cryptocurrencies that didn't perform didn't develop and have lost a lot from their previous position.
Some networks though are moving forward with developments and not stagnating, assets that increase their user base, and assets that are meeting the concept of their whitepaper.
It can be P2P electronic cash like Bitcoin Cash or Ethereum moving with Eth2.0 and PoS developments.
New cryptocurrencies appear and the established ones have to compete against these too. Even at the consensus level, a clear strategy will help. Increasing awareness and development are important for a network (and the underlying asset) to grow.