The unity of security and risk

The semblance of traditional financial markets behavior and cryptocurrencies has been a theme these past few days around here (Differences, parallels and crypto, If speculation is the use case). The observation isn’t about identity – obviously the respective nature of the assets is very different – but rather about the recognition of certain qualities and patterns that are shared.

At the root is the idea of fundamental analysis versus technical patterns, where the former is predicated on the substance and the use case of the product or the business model that underlies value, and the latter is the behavior of market liquidity (i.e., supply and demand) on the same. As fundamental analysis approaches a void, in the absence of supporting data, product, use case or business model, the asset’s market value and trading flows are largely substantiated by the technicals and charts.

In the case of cryptocurrency, this has been a defining quality, more or less, even as the shape of future fundamentals may sometimes begin to be observed. In the traditional financial markets, particularly equities and related, the sudden breakage of the fundamentals as economies shut down and their emerging new profile remains a mystery to most, the technicals (i.e., liquidity) seem to have displaced the fundamentals in the basic structure of it all.

When value based on technicals gets far ahead of that supported by the fundamentals, it is a bubble (or so at least I’ve argued here before) and this is only really known with hindsight, when it pops. For cryptocurrency, the notion is more delicate perhaps, because the underlying product and its use cases are connected and defined by their liquidity, so that the fundamentals and the technicals are not so clearly distinct. In this case it may be argued that what sometimes appears to be a bubble forming is in truth a network tipping point, and what seems like a price chart is a sort of look into network activity as well.

To an extent, and if the observation about the current state of markets has some merit, what holds true in crypto may now also hold true more broadly. And, if one conclusion from the crypto experience is that speculation is (at least so far) the product’s true use case, then perhaps we are now in a technically driven stock market where the same can be said.

WSJ

That there is on one hand a speculative risk-taking pattern taking shape (in financial markets) while, on the other, we see a flight to safety (in the consumer spending pull-back), these are not necessarily contradictory themes. According to some, safety and risk-taking are separate and distinct needs and behavioral motives on a basic human level – which contains multitudes, often contradictory on the surface.

Simone Weil [emphasis of red box added].

Perhaps we are now in a time when the philosopher’s hunch may be proven out by data.