Is your portfolio well-positioned for a $10 trillion market cap?

PLUS: Which market sectors will outperform this cycle?

June 22, 2024

GM! Welcome to Milk Road PRO – your weekly crypto deep dive that’s as exciting as finding buried treasure. Today, we're mapping out crypto’s journey to a $10 trillion market!

The total crypto market cap sits at $2.7 trillion today, encompassing the market caps of over 14.6k tokens. 

Prediction: We expect this market to grow and potentially reach $10-$12 trillion this cycle. 🥳 

Today, Bitcoin represents 50.38% of that $2.7T, Ethereum 18%, Stablecoins 5.93% and DeFi 3.74%.

Have you ever considered what the market might look like when we hit $10 trillion? Where will all of that new money flow? Will certain sectors outperform others or will everything stay the same?

Understanding this is the key to allocating properly right now to capitalize on the $10T opportunity of tomorrow. This is exactly what we are going to explore today.

If you want to make sure your portfolio is well-positioned to profit from this next bull run, this report is for you. 

So let’s start things off by showing you the end-results of this report. 

Here is the current market share of crypto sectors compared to our projections for the end of 2025.  

In today's report, we will break down the chart above and explain how we reached these insights as well as what it means for you to shape your portfolio allocation. 

We are going to answer the following questions:

• What is the current market share and risk/reward profile of different crypto sectors?

• Where do we predict the market share of crypto sectors will be when the market hits $10T?

• How can we optimize our portfolio to capitalize on the crypto industry's growth from $2.7T to $10T in the next 18 months?

P.S. - We’re hosting a PRO AMA next week — scroll to the bottom for more info. 👀

Let's start by looking at crypto from a high level. 

CRYPTO HIGH LEVEL VIEW 🧐

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Source: TradingView

Most people look at this chart of the total crypto market cap and wonder where it is going from here.  

While it's likely to go up (our target is around $10T-$12T), the key questions are: 

• How do we get there?

• Which sectors will contribute most to the total crypto market cap? 

• And how will this dynamic change?

We try to answer those later in the report. Before we get there, let’s talk about how to capitalize on this opportunity.  

What sets the best investors apart from the rest?

They make investment decisions today based on what they expect the market to look like in the future. So, we need to examine and compare the current state of the market with the future market.

Let's start with the current market composition of crypto. 

We can see clear Bitcoin dominance at 50.4%, followed by Layer 1 blockchains (L1s) at 28.9%. Together, BTC and L1s make up about 80% of the market share. 

The rest of the market consists of smaller sectors such as stablecoins, DeFi, memecoins, AI, and others (i.e. storage, metaverse, data availability, etc.).

This gives us a quick and clear understanding of the market distribution. We could simply predict where this market share will be at the end of this cycle and then match our portfolio allocation to this (ie. 50.4% in BTC, 28.9% in L1s, etc.) .

Or, we can add one more variable into the mix: Risk-reward.

Let us explain… We created the chart above – showing the risk-reward curve of crypto sectors – using a combination of factors.

We use market caps as one proxy for the risk-reward ratio of each category, meaning the higher the market cap, the lower the risk. 

Additionally, we evaluate the fundamentals of each sector, including revenue generation, user base, and network effects. 

Sectors with strong fundamentals and lower volatility generally present lower risks.

Conversely, highly speculative sectors like memecoins carry higher risks due to their unpredictability and the sheer number of options. With thousands of memecoins available, it becomes extremely challenging to identify the few that will perform well.

We don't want to dig too deeply into why we've positioned each sector at a specific place on that curve, but rather present you with the framework for looking at markets from different angles. 

This perspective allows us to better navigate the market and determine our portfolio allocation.

Let's finally reveal how we predict this market to play out when we reach a $10T market around the end of 2025. 

MILK ROAD PRO MARKET SHARE PROJECTIONS 🤔

Our main goal is to estimate how the future market composition will look and combine this with our risk-reward curve to develop a proper portfolio allocation. 

We believe this approach will help us make the most out of the coming growth in the crypto market cap.   

We start by looking at the future market composition at the end of year 2025 assuming a $10 trillion crypto market cap – this chart is essential for our assessment. 

Now, let's provide some reasoning behind our projections for the market by the end of 2025, focusing mainly on the top 3 sectors, which will represent 82% of the total market: BTC, L1s and DeFi. 

1/ Bitcoin

We anticipate Bitcoin's market cap to surge from its current $1.3 trillion to $4.0 trillion (3x) by the end of this cycle. 

However, we project other sectors to outpace Bitcoin's growth, causing its market share to drop from 50% to 40%.

In order to understand our predictions, we need to examine Bitcoin's dominance levels over the past years.

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source: TradingView

During the 2021 bull market, Bitcoin's dominance was around 40%. We believe that Bitcoin will eventually reach similar levels this cycle as well. 

Although we expect Bitcoin ETF inflows to continue, their impact on the price will diminish over time because increasingly larger inflows will be needed to cause the same price change.

Additionally, Bitcoin has already experienced significant growth this cycle and achieved new all-time highs, unlike many other crypto assets. 

This makes the odds of BTC growing faster than other sectors quite low. Consequently, its market dominance will most likely decrease.

Key points:

• Current mcap:  $1.3 trillion

• Current market share: 50%

• Projected mcap: $4.0 trillion (3.1x)

• Projected market share: 40%

• Projected price: $200K-$220K

• Market share change: -10% 

• USD inflows: $2.7 trillion

The second biggest sector is Layer 1 blockchains. 

2/ Layer 1s

L1s encompass all other blockchains outside of Bitcoin and we think this sector will go from $750 billion to $3.5 trillion.

This sector is still in its early stages with significant growth potential. 🚀

While ETH stands out, there are many other promising and highly capitalized blockchains out there (like Solana), plus more that are launching soon, all competing for market share.

Every other sector in crypto will be built on these smart contract platforms, indicating plenty of untapped potential in this area.

Today, this sector is valued at $750 billion, with Ethereum accounting for 54% of it. Therefore, we can use Ethereum as a representative of this sector and examine its market share trends in the past.

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Source: TradingView

At the end of 2021, Ethereum held over 22% market share. However, this time around, Ethereum will face much bigger competition, especially with the emergence of more performant blockchains like Solana. 

On the other hand, Ethereum will soon have an ETF, which is a huge driver for new demand. 

Additionally, Ethereum has strong network effects in the form of users, liquidity, and dapps. 

Moreover, $ETH is widely used across the entire ecosystem as the "money of the internet." This positions Ethereum as the absolute leader in this sector, and we don't expect it to be dethroned anytime soon.

We expect Ethereum to reach a price in the range of $12k-$14k, resulting in a market cap of $1.7 trillion. In that scenario, Ethereum would hold around 17% of the total crypto market share, similar to its current levels. 

If we assume that Ethereum will continue to dominate this sector with a 50% market share, then…

Key points: 

• Current market cap: $780 billion

• Current sector share: 28.9%

• Projected market cap: $3.5 trillion (4.5x)

• Projected market share: 35.0%

• Market share change: +6.1%

• USD Inflows: $2.7 trillion

However, it is important to understand the distribution of this sector. 

Today, there are only 7 projects with a market cap greater than $10 billion, which account for 82% of the L1s market cap.

We estimate that the L1 landscape could look like below. 

This chart shows that there will be one project with a market cap above $1 trillion ($ETH) and one project with a market cap between $500 billion and $1 trillion ($SOL?). 

These 2 projects will account for 70% of the L1 sector's market cap. 

Furthermore, the top 5 projects, each valued above $100 billion, will collectively account for around 90% of the L1 sector's market cap.

If you don't know why this is important, we will explain it at the end. Let's move on to the third biggest sector. 

3/ DeFi (Decentralized Finance)

We believe the DeFi sector will grow from a 4.1% market share to an 8% market share, adding $700 billion.

DeFi is one of the first sectors to be built on the blockchain and thus, it’s the most robust. It’s reached a stage where it’s ready for institutions to move their capital onchain and even Larry Fink, CEO of BlackRock says we are going to tokenize everything.

It’s an obvious sector that will outperform in our opinion (as seen in our PRO portfolio holdings).

Now, there are multiple categories in this sector such as lending, liquid staking, decentralized exchanges, derivatives and more. However, we won't go deeper into these categories today (full PRO report on the DeFi sector coming soon 👀).

In the meantime, if you consider the potential influx of new users and the amount of money that will flow into crypto, we believe the DeFi sector is poised for substantial growth. 

Let's have a look again at the historical market share of this sector.

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Source: TradingView

In the beginning of 2022, DeFi reached its peak at 8% of the total crypto market share. We can use these levels for our estimates in this cycle as well. 

So if we do, what does it mean for the numbers?

Key points:

• Current market cap: $101 billion

• Current sector share: 4.1%

• Projected market cap: $800 billion (8x)

• Projected market share: 8%

• Market share change: +3.9%

• USD Inflows: $700 billion

But again, we need to think about what the market distribution will look like. We don't go deeper into this today, but we plan to create a PRO report on this particular sector in the near future, so stay tuned for that. 

Today, there are 13 projects with a valuation above $1B, which account for 35% market share of this sector. 

This could suggest that this sector could be more distributed than the L1 sector.  

Here are our estimates, which again show the number of projects for a selected market cap. 

In this sector, the top 4 projects will have a share of around 50% and 14 projects will have over 90% of the market. 

Again we will take that into consideration at the end.

We won't cover the other sectors today because we want to focus on the main sectors that offer the best potential and risk-reward ratio currently, however once again, here is our full breakdown of market sector assumptions:

HOW TO ALLOCATE TO MARKET SECTORS 🔑

Now that we've provided some justification for our estimates and shared our perspective on how we look at the markets, let's put everything together. 

But before we start, a quick disclaimer: investing isn't an exact science; it's a game of probabilities. So, take our estimates with a grain of salt or make your own. 🧂

So how should we determine the proper allocation for each sector? First, we look at the potential growth and then we weigh the risks.

1/ Market Share Growth 💹

When discussing market share growth, it's important to understand both absolute and relative growth.

Absolute Growth is the increase in market share points. For example, growing from 10% to 15% means an absolute growth of 5%.

Relative Growth shows the change as a percentage of the original share. In the same example, growing from 10% to 15% means a relative growth of 50%.

Ok, so first let's look at the estimated absolute market share growth for each sector. 

The chart shows that Bitcoin could lose 10% of its market share. Remember, this doesn’t mean Bitcoin’s market cap will go down, it will still go up, just much less than other sectors. 

In contrast, L1s and DeFi could see the biggest gains, adding 6% and 3% respectively.

However, we also need to consider the relative change of each sector. This will show how much each sector's market share could change in comparison to its current levels. 

We can see that Layer 2 solutions (L2s) and Gaming could experience growth of 292% and 1,520%, respectively. DeFi and AI also offer quite promising growth, reaching higher double-digit percentages.

On the other side of the spectrum are Stablecoins (-24%), Others (-36%) and Bitcoin (-21%). 

Ok, so naturally we are interested in L1s, Defi, Memecoins, AI, L2s and Gaming. 

But now let's compare the risks.

2/ Risk-reward Curve 🛟

Now that we have a clear understanding of which sectors are interesting, we need to adjust our allocation to align with our risk profile. 

So we want to draw the line around the sectors we want some exposure to. 

The wider the area, the more allocation to that specific sector. The more down on the curve, the less risk. 

We basically combine all our learnings into this visual to better imagine our final allocation. We took into consideration of our projections, sector distribution and fundamentals.  

Our lack of exposure to stablecoins or Bitcoin indicates a preference for higher risk. However, we believe we've struck the right balance between risk and reward. 

Our allocation is heavily concentrated in sectors we are bullish on, while our exposure to less favorable sectors remains minimal or none.    

We have created a pie chart below to better illustrate our allocation. 

Here is the summary:

• Bitcoin: We don't want to hold any Bitcoin because we believe it will underperform the market.

• L1s: We believe it makes sense to allocate 70-80% of funds to Layer 1 blockchains, as this sector is expected to outperform the market. We suggest holding 2-5 projects, which would give exposure to 70-90% of this market.

• DeFi: We believe it makes sense to allocate 12-18% to DeFi due to its significant upside potential at acceptable risk levels. We expect this sector to grow 8x and suggest holding 4-8 projects, ideally the top performers within their specific categories (lending, staking, derivatives, etc.). More info about this in a future PRO report. 

• L2s: We suggest an allocation of 2-5% to Layer 2 solutions.

• Gaming and AI: These sectors will receive the smallest allocations, between 0-2%.

KEY TAKEAWAYS 🧵

Before we wrap this up, these should be your takeaways from this report:

1/ Look at the current market structure and try to understand the main sectors. 

2/ Don’t be afraid to make your own predictions about the future composition of this market and share those predictions with others. Be open to and thankful for critique. 

3/ Consider the risks for each sector. 

What needs to happen in each sector for it to really take off? What is driven by fundamentals and what is driven by speculation? What is the current market cap? How volatile are these assets? 

Answering these questions will help you define the risks for each sector.

4/ Finally, make a decision on how you want to allocate your money based on your findings. 

We promise that if you follow these steps and complete the entire exercise, you will not only learn a lot but also gain much more confidence in your portfolio. And that's our goal. 

This is the framework we use for our Milk Road PRO Portfolio. If you find this approach appealing, you can follow our portfolio here. 

That's it for today. We hope we gave you some perspective and inspiration on how to think about your portfolio allocation. 

If you have any questions or want to discuss this topic further, feel free to join our Discord using the link below. 👇

We are looking forward to hearing your own projections. And remember, don't f*ck this up! 

Good luck! ✌️

FRESH AMA COMING UP 👀 

We’re hosting a PRO-only AMA to answer your burning crypto questions! 🔥

Wen? 26th of June (Wednesday this week).

Where? In the Milk Road PRO Discord (the meetup channel).

What are we talking about? That’s up to you! Submit your questions here.

Important: If you don’t submit your questions by Monday (June 24th), we’ll probably not answer yours. 😢

Not in the Milk Road PRO Discord yet? Join 1,000+ fellow members here & don’t miss out!

Note: Upon joining the Discord, you’ll be asked to fill out a form. Please, please pay attention to 2 things:

1/ Enter the exact email address you used to sign up to PRO with.

2/ Enter your exact Discord username (not your handle).

Do this with bomb-defusing precision—a single typo might lock you out! 😬