Early Liquidity

Ever since I got interested in crypto, I have looked at the emergence of the commercial Internet in the 90s as a roadmap for what to expect.

And while that has largely been useful as a frame of reference, I’ve struggled with the huge bubble of 2017 which felt to me like it came too early relative to the maturity of the sector.

Yesterday I read this post which has a great explanation for that:

The bubble came early because blockchain technology enabled liquidity earlier in its life cycle.

That makes a ton of sense to me and reframes the timelines in my mind.


Some of you may have noticed that I waited until very late in the day today to post. I’m struggling a bit with adjusting to time zones, a head cold, and today was just one of those days where nothing went as planned.

I’m not planning on making early evening eastern time my regular routine.


Comments (Archived):

  1. kidmercury

    One easy contra take is that bubbles always create their own liquidity, ie housing bubble in 2005 had CDO market. So liquidity can never come early, it comes whenever the market manufactures it, and it does not take a meaningful amount of time for this manufacturing to occur.

  2. William Mougayar

    There has been a tug of war between the state of blockchain technology development and its application.Early on (up to 2015), the technology promise was way ahead of any delivery. Then in 2015-2017, the developers delivered a 1.0 version which the business people took to an extreme and tried to make the technology do more than it could. They wanted more. They hyped and crashed the system.Now, the developers are back at work trying to develop the 2.0 we need, so that eventually the technology and the businesses wanting to apply it will be in lock-step sometime in 2020+ most probably.

    1. awaldstein

      Damn long explanation on the state of the the blockchain space without one mention of the market or the behaviors of the customers.The projects I like start with need and backtrack into how to platform it. In any space in any cycle.

      1. cavepainting

        Early Adopters (Users) are the same in every cycle. They don’t give a damn unless a new thing makes their life substantially better at least on one dimension that truly matters to them. They are willing to make trade-offs but it has to deliver on something that is a) important, and b) the incumbents really do not address. Multi-coin capital calls this: “A n dimensional matrix of value drivers with multiple local maxima”. A successful project has to hit at least one local maxima with enough demand. Most blockchain projects are too ambitious, too early, or simply do not make sense because they are substantially worse than existing alternatives for the “job-to-be-done”.Investors are the same in every cycle. With few exceptions, they are mostly driven by greed and FOMO. So their judgement is suspect in the early stages when there is lack of data; even more so in the recent cycle, where crypto retail investors were the ones allocating capital based on speculation and rumors.With the squeeze on capital, more likely that the quality of surviving projects will be a lot higher.

        1. awaldstein

          i view this differently.early adopter pre internet, during the cross the chasm phase, early open source, personalized ecommerce and crypto are to me not the same as the community structures and the communications channels have evolved.people at their core are the same to some degree but success lies at understand that core sameness and the layered differences that culture adds to the complexity of the market reality.

          1. cavepainting

            You have a point there. Social media and community aspects simply did not exist in previous cycles. But at the end, does it not all come down to a single user and the value they accrue from using the service and how it compares to existing alternatives? Unless you pass that litmus test, everything else seems to be theoretical possibilities.

      2. William Mougayar

        If the technology is not ready, all that is irrelevant. Same applies if the technology is misused. You can start anywhere you’d like, but the implementations will fall short.

        1. awaldstein

          of course and thanks.i enjoyed thoroughly though disagreed mostly with your tweets on marketing last week. touched a cord with me.they were the reason for my comment as you can’t analyze the entire sector, judging marketing outreach to consumer touch points if there is not products touching the market.possibly I misunderstood.

          1. William Mougayar

            “disagreed mostly with your tweets on marketing last week”- that’s a pretty broad blanket statement Arnold.Happy to have you come back with something better than I have observed after interacting with 300+ blockchain companies and been 6 years in that sector.

          2. awaldstein

            Ahh…pushed a button it seems.I couldn’t do better and am not an analyst by trade or intuition.I found it really useful and spent some time on your infographic as many projectsI knew, many I didn’tBut–to my read there was no criteria that you shared for why in a category of ‘over marketed’ which includes exchanges, decentralized and centralized projects, i had no idea what you were looking at.That was the rationale behind my statement.Or maybe it was there and I missed it.You can interpret as a slight, but it wasn’t as I have and still follow you as an expert in the space.But if someone is going to provide a matrix of that covers marketing and community, where I’m an expert, it is both interesting topically and more useful if i understand the ‘why’ of the criteria.

  3. OldManGoldenwords

    What is your opinion on quadrigacx going burst because of its dead CEO?

  4. cavepainting

    The internet vs. what existed before was 100x better.The smartphone vs. desktop was at least 10x better in terms of accessibility and getting core jobs accomplished.Both were huge transitions that truly unlocked massive amounts of value for users and companies that caught these waves.What is the blockchain replacing?1) A new store of value that can be an alternative to gold and fiat, 2) A new way to lend, borrow, and invest (Defi) that replaces traditional banks and brokerages, and 3) A new way for supply and demand to connect and engage without traditional middlemen (web3 tech)Each is a mega opportunity, but to come to fruition, they need a much higher level of supporting tooling and infrastructure than exists today. It is silly to dismiss it all as hype. It is also naive to think it will transform the world in the near-term. The long term trajectory is more likely to bend towards decentralization in these three areas, but we have a circuitous and unpredictable path from here to there with recurring loops of bubbles and crashes.

    1. Adam Sher

      I struggle to see all three of these points.1) how is this meaningfuly different from alt items like the currency in a massively popular game such as World of Warcraft. That game has some base level of participants who have transacted in USD:WoWCoin for longer than cryptocoins. Cryptocoins may achieve stability after some period of time where it was pegged to the USD (e.g. Chinese Yuan for fiat). Maybe 1 coin achieves this status.2) microlenders do this. Will a blockchain supercharge or replace microlending and make it mainstream for all?3) Aren’t miners middlemen in a blockchain world? Are there blockchains were there is a direct relationship service provider and customer (e.g. smart contract chain for home deeds and home owner)?

      1. cavepainting

        Skepticism is warranted at some level, but there are also substantive differences.1. Unlike game virtual coins, currencies like bitcoin are not run by a central intermediary. The currency has limited supply and an open monetary policy implemented in open source code. From the genesis block to the latest transaction, all activity is transparent on an open ledger secured by thousands of nodes. Is volatility an issue? Yes. But digital gold (especially bitcoin) as a SoV/sound money is a strong use case and on stronger footing than the other two.2. Micro-lenders are centralized. Defi is primarily about non custodial and decentralized lending and borrowing without a central intermediary collecting rent. There are pros and cons to Defi but it is fundamentally different from existing financial services.3.Yes, but unless they are operating as a cartel, miners are still a distributed set of people. Web3 is fundamentally about users exercising more agency (like engaging with suppliers or websites using their own wallet, locker, messenger, identity, etc.) so that they are not beholden to middlemen, can own their data, share it selectively, make themselves less vulnerable to get hacked, etc.Blockchain and crypto are fundamentally about freedom. Freeing money from govt. manipulation, freeing money from rent seekers like banks and FIs, and freeing user data and “work” from those charging exorbitant rent.Who knows if it will work or not, but hard to argue that it is not a worthy long term goal or directionally wrong.

        1. Mario Cantin

          “Blockchain and crypto are fundamentally about freedom. Freeing money from govt. manipulation, freeing money from rent seekers like banks and FIs, and freeing user data and “work” from those charging exorbitant rent.Who knows if it will work or not, but hard to argue that it is not a worthy long term goal or directionally wrong.”Best summation I’ve read in a long while, if not ever.

        2. Adam Sher

          Blockchain and crypto are fundamentally about freedom. This potential makes sense to me. For example, the hubub around demonetization on YouTube, deplatforming on Patreon, and public pressure on MasterCard to have on opinion on who it allows for its network for social justice reasons and not illegal activities all make it apparent that there’s more risk that we acknowledged around freedom to spend money and operate.My understanding is that blockchain can provide such a solution. Let’s take the example of Sam Harris’ podcast. He left Patreon because he determined Patreon arbitrarily removes people from its system. If he hosted his business on some podcastchain, what would need to happen for the podcastchain to prohibit his ability to conduct business on it? Or would it be impossible to restrict his transactions?

          1. JH

            It depends on a lot of factors, but a system could be designed to make it nearly impossible outside of a 51% hack (or some equivalent based on the consensus protocol).

          2. Adam Sher

            It’s hard for MC to prohibit a transaction because it’s effectively money, and you could petition the FCC or sue MC to challenge their decision to ban you. So it’s imperfect but there’s a way to balance MCs power.Per Cavepainting’s 3rd point, miners are independent actors unless they collude. Isn’t that what happened with Bitcoin? You have massive mining farms that outcompete individuals for rewards? Further, if a blockchain is proof of work and becomes sufficiently large, a group could gain advantage by being the firstf to convert to ASIC. I don’t know how hard it is to build in protection against ASIC mining though and acknowledge blockchains like Ethereum try to counter ASIC.I guess it comes down to the situation. Does blockchain make it sufficiently harder to restrict commerce, or freedom, that it’s worth converting? Not all activities require a blockchain solution, which is why when people list every business activity, it’s hard to take them seriously.

          3. JH

            For the most part it’s technology looking for a problem to solve.Miner collusion gets less and less probable as the network grows in size, and the mining incentives for a healthy network encourage new entrants and distributed innovation around how mining is done more efficiently. In theory, this makes 51%+ collusion or some kind of proprietary ASIC development amongst a cartel of miners very unlikely.But I suppose it’s still a non-zero probability.

          4. Adam Sher

            For the most part it’s technology looking for a problem to solve. That is generally how I feel about it. Doing my best to understand it more. @wmoug ‘s ebooks were instructive to me.

          5. JH

            They are always watching…Getting back to tech looking for problems, Chris Dixon has an interesting perspective on why decentralized networks will eventually overtake centralized systems and platforms. It’s worth reading: https://medium.com/s/story/…Note his view that freedom is not the main reason decentralization is important…

        3. JH

          Blockchain and crypto are fundamentally about freedom. Freeing money from govt. manipulation, freeing money from rent seekers like banks and FIs, and freeing user data and “work” from those charging exorbitant rent.In countries where central banks are malevolent, this makes sense. In the US, I would argue that centralized monetary policy has real value. So do banks and financial institutions. Just because some trusted third parties are bad does not mean the idea of a trusted third party should be done away with.The big FIs aren’t going to just sit there and let themselves be disrupted into irrelevance. If anything, this will force them to become more competitive with their rents while still playing a valuable role as a trusted third party. Look at Zelle as a small case study.I think one of the most interesting use cases for crypto is in emerging economies, democratizing access to capital for the poor. That is where the idea of freedom merges nicely with legitimate need and clear incentives for adoption.

      2. Lawrence Brass

        Yes, 2)I’ve always thought that microcredit and micropayments is the crypto app with greatest potential. So many barriers still. The incumbents won’t let it go without a fight.

        1. Adam Sher

          I agree. But why wouldn’t I build a blockchain with rules as draconian as some micro or low-income lenders?

        2. Andrew Cashion

          Yes, but won’t they have to do that in USD and Chinese Yuan?

          1. Lawrence Brass

            I guess that at first, yes then gradually detach. It would be similar to what happened with currencies during the 20th century that were progressively detached from their solid gold or silver backing. From Bretton Woods to where we are today. The last step of the process may be full and legal crypto. Why not? After all the balance of our bank accounts is a digital number stored somewhere backed by a set of rules and laws, nothing more.

  5. JamesHRH

    There is a dilly of a flu season going down. Good luck.Same for the liquidity early theme on crypto.

  6. Mario Cantin

    While everyone else is diving into crypto comments, what catches my attention most about this post is how one sentence from one blog post could realign and sync Fred’s entire frame of reference — a frame which has been built over years of continuous pondering. There’s real power in that. I’m constantly looking for the scarce tidbits of observation from others that can act as a fulcrum to lever with and turbo-charge my modest intellect. And that means constantly filtering through and triangulating with less relevant data.

    1. cavepainting

      yes, one line or phrase can deliver deep insight or change frames of reference. It is indeed the proverbial needle in a haystack. We are all constantly looking for these Aha moments but they are either hard to find or they swim too fast past our fatigued minds.

      1. Mario Cantin

        Ha ha, well said.

    2. Jim Peterson

      Good point. The “phrase that pays” can launch a huge business. Pepsi was going nowhere attacking the institution that is Coca Cola.They asked how can we take on an old brand that is like mom and apple pie (back then)?Then they landed on Coke IS an old brand. Pepsi would be for the New Generation.” The ads pounded on that concept- and along with the taste tests built Pepsi into a major powerhouse.

  7. csertoglu

    I think another factor for the early bubble is social media is a very efficient medium for bubbles (or echo chambers, memes, hate speech, trolling, cyberbullying, etc.) to emerge within, and we did not have that during the dotcom bubble of 2000.

    1. Susan Rubinsky

      Agreed. We had the forums (my space, chat rooms, etc) in the earlier tech bubbles, but not the mass adoption that we have now.

    2. JH

      Agree. Speed and access to information can’t be ignored as a major player.Crypto is also a global, unregulated market. Once easy fiat onramp became “mainstream” it was a perfect storm.

    3. Roger Dickey


  8. Susan Rubinsky

    Hope your cold gets better soon and enjoy LA!

  9. Pointsandfigures

    Changed the way a lot of startups thought about fundraising given ICOs so valuations exploded as well. I looked at crypto through the lens of the internet, but also the way the NASDAQ traded from 1995-2001. Discipline kept you out of trouble

  10. harris497

    My concern about crypto is the question of value. Where does the value backing the currency reside?

  11. Burak Yenigun

    I cannot think of a single asset class that is as poorly anchored (to some fair value center of gravity) as crypto:Art/collectibles would be a good comparison, but art lacks liquidity, and social media promotion. Latter is probably due to former.Another good comparison would perhaps be early-stage startups. What if shares in early stage companies in a hot industry, (say, AI) were allowed to trade publicly? What is there to anchor a valuation?

  12. jason wright

    solid (block), liquid (capital), gas (blah, blah) – that’s crypto.

  13. Capitalistic

    It’s become a function of timing your entry and exit with nascent sectors with undefined end markets.

  14. Roger Dickey

    Why will crypto follow the arc of the internet? This has always seemed like an obviously false equivalency to me. Smart people tweeting pictures of the early ARPANET spec as incomplete analogies to crypto. It is so ridiculous it smacks of pump-and-dump. The internet has many use cases yet crypto does not. Haven’t decentralized databases been around for decades? There isn’t a “why now” anymore.