A discussion that's come up with a few fund managers recently: can altcoin profits be "recycled" into BTC (or ETH)? A surprisingly nuanced topic I'll explore here. /1

2/ First, let's establish the idea of "paper" profits. If two traders trade dogecoin back and forth with each other and higher and higher prices they can potentially drive the price up 10x unless new sellers step in.

3/ But unless some new third player enters the game, these two traders have no way of taking profits. They may each on paper own $1m of dogecoin at the new 10x price, but the moment they try to take profits, they'll collapse the price back to where it started.

4/ sometimes altcoin (or even BTC) rallies are like this. They're "paper." They're insiders trading an asset against other cryptocurrencies (or even fiat) and as a group, those insiders have no hope of exiting with those profits.

5/ other times, rallies are supported by an inflow of new money. The altcoin rally in 2017 certainly fit this as masses of new investors put money to work for the first time in cryptocurrency. That let earlier investors lock in a profit.

6/ of course this isn't binary. Usually rallies are a mix of both insiders trading back and forth, and at least a little new money. But to know if the profits can be recycled and to what degree, we have to know very roughly how much of the profits are "paper" vs "real."

7/ Now to the point - let's take defi. We've seen much of the defi rally explosively over the last month (for some assets, it's arguably more of a 2020 phenomena.) Is that "paper" or "real" for the most part?

8/ while buyers of, say, COMP are almost certainly existing crypto investors (and thus COMP purchases come out of BTC, ETH, or fiat that would otherwise have gone into some other token), there's also been a shift within crypto that I think counts as "new money."

9/ many crypto investors who had no interest in defi now expect to have some meaningful allocation to it in an ongoing way. That lets earlier defi investors capture at least some of the gains as "real." Those early defi investors can sell, say, COMP, to buy ETH. But....

10/ in this scenario, who's buying that COMP from them at the top? Probably someone selling ETH or BTC for it. So the recycling of COMP profits into ETH is likely roughly offset by the exact opposite (just a rough guess.) Again...but...

11/ I think that we've had gradual inflows into the crypto space in 2020. Most of that new money first flows into BTC, some into other largecaps, and then crypto insiders take profits in those coins and look at riskier investments like COMP and other defi tokens.

12/ it's kind of like a poker game. There's some big fish bringing new money into the game and then pros circulating it back and forth. But over time, there's more real money in the game that the pros do get to pocket as "real."

13/ again...but....look at the relative dollar amounts. ETH is a $26 billion market cap token. If defi rallies by $2b and some fraction of that gets recycled into ETH, the sale of $1 has a *much* bigger impact on defi than a buy of $1 has on ETH.

14/ TLDR: recycling of profits is real when there's new real money entering the system, but likely has a pretty small impact on BTC and ETH since they're so much bigger than the token profits that can be recycled.