The birth of a new asset class: crypto assets. Part I: Retail investors love magic beans

This post reflects my personal views on the current crypto market.

Since last spring, I have been following the growth of the crypto market. After sharing my thoughts on the crypto capital markets landscape and crypto funds (setup and landscape), I wanted to share my view on crypto as an asset class. As always, I am very happy to have a chat or share notes with other investors / companies. You can email me at or use if you want a quicker response.

“ In times of change, learners inherit the earth, while the learned find themselves beautifully equipped to deal with a world that no longer exists.”
Eric Hoffer

A few months ago, I had lunch with a former trader who told me “This is my third asset class. I have traded commodities, then derivatives and now it is crypto. However unlike the precedent waves, Wall Street is late to the party and early investors are very different. They are very technical and sometimes often see crypto / decentralisation as a religion. They don’t want a yacht or a lambo; They want to hodl their tokens.”

I think he was right. We are at the birth of a new asset class. As Andreessen Horowitz puts it “cryptocurrencies are a new asset class that enable decentralised applications”. Or something like that. Some much smarter people than me like Chris Burniske and Adam White already wrote about the birth of the new asset class few years ago.

In this post, I highlight the different stages of the birth of the crypto asset class through a simple framework of technology adoption. In a second post (published during the last week of December), I shall discuss why institutional investors are keen on crypto. Finally. I address the adoption challenges for institutional investors.


Paradigm shift->Believers->Converts->Speculation->Retail FOMO->Institutional money->BURST

First there needs to be paradigm shift, a fundamental change in approach, such as the advent of a new technology. Here comes “How blockchains could change the world”.

The first adopters are called believers. This group believes that the new paradigm has a massive potential (e.g. the internet or the blockchain technology). They are not just driven by the potential financial upside but really believe in the technology and want to prove that the technology works. Some examples of blockchain believers include Nick Szabo, Hal Finney or Gavin Andresen.

Once the technology / paradigm shifts have shown proof that it works, the product-market fit stage begins. Interestingly, this period in crypto is associated with a pricing discovery phase as tokens are traded on public market 24/7. However, as the asset class is new it lacks a proper valuation framework and robust offer / demand. Investors try to use combinations of past approaches (e.g. quantitative, qualitative) but this discovery phase can take a long time.

During this phase, converts start to appear. The first converts fall often into two buckets: young professionals and high net worth individuals (HNWI). Both have a high risk appetite and high intellectual curiosity. The first group is looking to build the infrastructure to support the new technology such as Fred Ehrsam and Brian Armstrong founders of Coinbase, or Juan Benet, founder of Protocol Labs. The HNWI invests in new companies or in this case tokens with a long term view of the potential upside and can bear costs of failures. Some examples include Chamath Palihapitiya, Mike Novogratz or Naval Ravikant.

Soon after the smart money starts to be interested and invest in both companies and token. By smart money, I referred here to investors with habits to take bets on new technology such as VCs (e.g. USV, A16Z) or hedge funds who make a living by managing risks. Note, with regards to bitcoin quantitative hedge funds (e.g. Jump Trading, DRW) were actually the ‘real’ smart money as they combine a strong technical and institutional investing background.

The growing interest fosters a rapid rise aka speculation phase (e.g. the total crypto market cap grew in 2017 by 37.2x — enough for making anyone a hedge fund star). However, most investors at this point lack an understanding of the technology and valuation framework (there are 2.7m results for “How to value Bitcoin” on Google.) causing polarising views on pricing and about the legitimacy of the asset. Look at the cool Bulls & Bears tracker.

However, speculation continues to drive further interest and raise awareness among a larger portion of market participants. New investors launch dedicated investment vehicles to profit from the rapid growth. You are not alone my crypto hedge funds friends. There 100+ crypto funds like you. Note, the majority of these investors understand that prices are abnormal but the fear of missing out (FOMO) and “easy money” make it hard to resist. Everyone wants a Lambo. Everyone wants to be a crypto millionaire.

However, the speculation phase is needed for long term adoption. As Joel Monegro from USV puts it “Speculation is often the engine of technological adoption”. The more people are aware of crypto / decentralisation the better it is. New entrepreneurs will try different token launches,governance models, consensus mechanisms etc… Yes. most of these trials will fail but this is exactly the point. The velocity of trials increase exponentially with speculation which in turns allow more success and failures.

In the previous speculation phases (e.g. internet), the retail market was the last to be able to invest / participate in the advent of the new asset class . However, for crypto Wall Street is the last one. More on that later in this post.

This “irrational exuberance” can persist for years but eventually burst due to a vast range of factors including regulatory, idiosyncratic or macro drivers, causing prices to precipitously decline before stabilising at more reasonable levels.

Post burst, the vast majority of profit may disappear but the technology is here to stay and the number of converts have reached a point of no returns. The final phase is driven by builders referring to converts working on new companies with a more sustainable business model and using past knowledge.

Retail investors love magic beans

Source: Fortunes

As of December 2017, we are right in the speculators phase. Everyone buy crypto. Everyone is making profit. Even my 85+ years old granddad has a strong crypto investment track record. Everyone seems to have a friend who is doing crypto day trading and now is a millionaire. But no one really knows what is a coherent product market fit for the technology and if actually the tech can support real world use cases.

Even the two advanced projects, Bitcoin and Ethereum, are still in “Beta mode”:

Today, the limit of the technology is ignored by the level of speculation from the retail / semi-institutional market. A friend from San Francisco told me that he now notices more people using Coinbase on public transports than on WhatsApp / Instagram / Snapchat combined. This is slightly worrying.

A prime example of the retail boom is Coinbase. The firm is now the №1 iPhone app in the U.S. and has exceeded Charles Schwab in total number of accounts. The addition of the new COO puts Coinbase in a great position to become a next-gen bank / asset manager / broker.

However, the number of crypto investors / hodlers remains somewhat limited. Ari Paul recently estimated that the total number of Bitcoin holders is around 45 million people today. Interestingly, if you do a back of envelope math, I estimate that about c.$7bn was invested in crypto ($3bn+ from crypto funds, $3.8bn from ICO) without taking into account the retail market. If you assume retail investors invested as much (which seems to be high) then about $14bn were invested from fiat to crypto. This is not a lot. When is the real money coming to crypto?

Thank you for reading my post.

Don’t forget to share with friends and your bitcoin early adopters colleagues.


Thank you Leon Marshall, Jason Manolopoulos, Rasheed Sabar and Jon for your feedbacks.

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