If speculation is the use case

A notion that is most interesting to consider in the investment thesis published by Andreessen Horowitz – The Crypto Price-Innovation Cycle – is the sequential flow and the direction of the arrows.

Andreessen Horowitz

A certain order is implied, circular in nature, that may originate at any of the spheres and cycle back around clockwise through the laid-out system.

One could, as a visual experiment, divide the cycle and the flow into its basic elements, where the two spheres on the left represent market liquidity, driven by supply and demand, or, in analytic parlance, the technicals…

… and the two spheres on the right represent the underlying use case of the product and its future possibilities, or the fundamentals…

Because the nature of the flow is circular, the cycle may begin with fundamentals and lead to technical action, which is to say, the product’s function could drive market price; or it could be that market price and interest may drive the product’s fundamental base.

The implied relationship of technicals and fundamentals in the illustrated loop may be recognized by market followers as reflexivity, and by network analysts and builders as network effects. The concepts are similar, and maybe even interchangeable in the context of financial markets, which are large multi-directional networks.

One could take the idea a step further – if reflexivity and network effects indeed apply to the case at hand – and reverse the order of the circular mechanism, such that the presented sequence leads to price, which would in turn drive use and substance, in counterclockwise fashion…

… or, maybe more correctly still, a scenario in which the technicals and fundamentals act and counteract on one another, signaling and inferring, leading and following, depending on the circumstance, or possibly at all times in balance.

This balance is especially significant in the particular case of cryptocurrency, where use case and liquidity are not only interlinked, but arguably one and the same. And this gives rise to a more general idea about value swings and market trends that rise or dive…

If a value bubble is defined as a wide divergence between technicals and fundamentals (i.e., between the market supply-demand dynamic and the function of the underlying asset), and if technicals and fundamentals are tied up into one, what may appear as a value bubble in the crypto segment may be in truth a network tipping point, or anyway a graphic illustration of network behavior.

In the broader market context, for investment securities of any type, we may now be in a phase in which the blue box on the right (the fundamentals) is being redesigned; a phase in which the business models, the profiles, the technology solutions, may be reinvented, with an outcome that is currently unknown. There is a parallel in all of that with the crypto experience to-date, and so ideas such as bubbles, tipping points, balances and interplay of technicals and fundamentals, may similarly apply.

It may be argued that the primary and mainstream use case of Bitcoin has been as a speculation mechanism, which over time may lead to other things. Perhaps we’re at a point where similar views may be justified about financial markets more generally. The referenced Andreessen Horowitz report might thus also be read in a wider context.