A value bubble happens only as it pops. Even then, it is a matter of how much and for how long. Until the pop, one can only theorize and speculate. The commentary that follows is speculative and theoretical.
Defining a bubble to mean a wide divergence between the function of an asset (its fundamentals) and its market supply and demand dynamic (technicals), there is something of interest in the idea that this divergence can only really be known with hindsight. Until that point, it could be that fundamentals drive market value as much as the other way around (reflexivity). When the bubble has burst, we can surmise that value got ahead of the use-case, or maybe the use-case never quite caught up. Thus, a new cycle of theory and speculation begins.
With that by way of backdrop, we consider cryptocurrency. The use-case here, the underlying function, is not yet properly defined, and still the value of some coins runs hundreds of billions of dollars. One possibility, which seems obvious to many, is a bubble, and a giant one at that. Another, however, is that the nature of this thing is simply different. Given the new and unique underlying system — its diffuse mechanism where the product and its network distribution are one and the same — maybe in cryptocurrency we see a special and possibly unprecedented case where the fundamentals and the technicals are converged. In other words, it is possible that function and liquidity here are conjoined by trade, perpetually and in tandem, and it is the network that reflexively determines both the value and its use-case.
An asset whose purpose and liquidity are not only related, but actually the same, cannot inflate a bubble, according to the stated definition. There may be price swings, as there often are, and even sharp ones, as there have already been, but that reflects the thing’s basic nature.
In an earlier post, a list of questions underscored the possibility of new value drivers and analysis in an economy massively transformed by digital technology. More recently, a post about networks as a central element in this new environment concluded with this present subject of cryptocurrency, a network-based technology shaped by digitized economic elements. The suggestion was made that the recent coin market surge, rather than signaling a bubble about to pop, could instead mark a network tipping point — an entirely different situation: Then, participation and network effects have reached sufficient density and scale to further expand the network (quickly, organically), price swings notwithstanding.
This is the thesis in any case, and from it some new questions follow. If there has been a tipping point in this network, then capital flows and formation are exposed to significant possible disruption. (If, instead, this is a bubble, maybe all the same.)
10 [further] questions for the new economist
- Is attention (rather than information) the greater force and driver of an information economy, and is this one of the crypto-phenomenon’s key lessons?
- In such an economy, is the reserve currency that which attracts the most attention?
- Could a cryptocurrency explosion begin to pull attention (i.e., capital) from traditional capital markets?
- How might such swings in financial attention reshape the nature of investment, and, by extension, strategy?
- What is the effect on local capital formation when value is determined by information and attention outside of geographical confines?
- What is the potency of territorial governance in a globally distributed network environment when this is decentralized?
- In what way are the information centers of distributed networks protections or vulnerabilities impacting capital formation?
- In what way does competition between finance networks differ from network competition in other information areas, such as telecommunications, media, or commerce, and is there a difference in an attention economy?
- Will competition between (public) networks within the cryptocurrency domain resemble competition between (private) banks or financial exchanges, and what could be the competitive impact on fund flows?
- Could a decentralized network structure in cryptocurrency disrupt the gravitational centers of established networks, or would an emergence of new centers replace the old?
In short, if the currency, rather than its underpinning blockchain solution, is the network’s driving force, there may be economic consequences beyond labor and productivity and monetary mechanics. If we should at some point conclude that cryptocurrency is not to be dismissed with bubble-speak, even as volatility happens, then these questions and others (that have been asked before) could be revisited in earnest. The value and its asset may, reflexively, evolve… as may other assets with other values in and around the area.