The Kaizen Crypto Market Model
In the first article of this series, we used the Gartner Hype Cycle Model to put the severe cyclicality of the crypto market and its current bearish state in the broader context of an emerging technology’s typical progression, from initial user and media over-enthusiasm to an eventual understanding of the technology’s relevance and role in the market.
In the subsequent article, we took a look behind the scenes of the ongoing bear market and elaborated extensively on telltale signs that crypto is not an ill-fated technology. Rather, it is poised towards mass adoption.
In this article, we will introduce you to the Kaizen Model — a comprehensive framework to determine macro and micro market cycles and the forces driving them.
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The Kaizen Model: Going beyond the Gartner Hype Cycle and the Crypto J-Curve
Decentralization will not happen overnight. Rather, adoptions will be driven by the progression and understanding of its underlying technology — blockchain — which is following the Gartner Hype Cycle on its path to becoming a mature technology. We consider the Gartner Hype Cycle to be a good macro trend model for evaluating the evolution of the overall crypto space. This macro trend is formed from the inside out by underlying, over-repeating micro trends of different length & magnitude, while at the same time also reciprocally determining the nature of these micro trends.
We use Chris Burniske’s Crypto J-Curve to model these reiterating secondary trends and their effects on the prices of crypto assets: The basic idea of the Crypto J-Curve is that the price of a crypto asset is composed of two forms of value: 1) its Current Utility Value (CUV) and 2) its Discounted Expected Utility Value (DEUV), also sometimes called “Speculative Value”.
The J-Curve tells the following story: When expectations in a project are high initially, so too is the price. At this point, price is largely a function of DEUV. CUV is only marginal or even non-existent as there is no real value to the token yet.
As expectations wane (lowering DEUV), the price drops, even as CUV may grow. This is the phase when the wheat is separated from the chaff: Projects that do not bring a real-world value die, while successful projects summon CUV and continue to see their DEUV follow suit in consequence, pushing price above previous highs. Then the cycle repeats.
While Burniske’s J-Curve does a great job predicting price manifestation of the above shifts in market sentiment and utility value, it fails to gauge the interplay between macro and micro trends.
How does Kaizen model go beyond the J-Curve?
Let us start by elaborating on the underlying key differences between CUV and DEUV.
CUV is the result of the actual utility value of an asset. This utility value by nature can only and exclusively be asset-specific. Always.
DEUV is formed by the market’s expectation of the future utility value of an asset. The underlying drivers for such expectations are almost never purely asset-specific. They rather hinge on the market’s overall outlook for the underlying new technology and/or sub-segment of the asset. To what degree, depends on the overall understanding of the potential and limitations of the new technology and its stage of adoption: In the early stages of a new technology, there is only a very general, not yet well-founded expectation of its future potential. The usefulness of different applications, let alone their feasibility, is yet unclear. The technology is still immature and so is the market’s understanding of its potential and limitations. Consequently, the DEUV of a specific asset at this point is very much driven by the overall expectation of the market for the underlying technology. Put differently, the DEUV of the asset is not asset-specific, but rather technology-specific, or, in another word: general.
The more a technology matures, the better its potential and limitations are understood by the market. Some use cases are completely discarded, as their proponents fail to create actual value (CUV). Other use cases become a victim of timing — they fail spectacularly to only be picked up at a later stage, when the market is ready for them.
And then there are use cases that work out — the assets of proponents of these use cases start to create CUV. The market’s understanding of the potential of such assets becomes more robust. Thus the DEUV becomes a better-understood function of the potential of the use case specifically, not just the underlying broader technology.
This cycle keeps repeating over and over. The higher the CUV climbs, the better the market’s understanding of the driving forces of the asset’s DEUV become. When the market reaches its full understanding of the technology’s relevance (for a specific use case), the asset’s DEUV is almost exclusively asset-specific. At this point, the DEUV becomes a function of the perception of market share the asset can capture going forward.
In summary, the DEUV of a crypto asset’s price is dependent on the overall stage of understanding of Blockchain technology and its relevance for a specific use case. The stage of progression as per the Gartner Hype Cycle impacts on the DEUV of the crypto asset and thus its asset price as depicted by the J-Curve. Over time, the composition of DEUV shifts from general to specific. Since the pace of progress of new technologies accelerates over time, so does the shift from general DEUV to specific DEUV.
Simultaneously, the underlying, repetitive micro cycles of expanding and contracting DEUV and CUV compositions of an asset’s price are at force.
Recognizing these ever-changing market dynamics is important for an investor insofar as to not fall prey to the misconception that history repeats itself. At best, history rhymes. Immature markets evolve and what was true for them yesterday will not be true tomorrow.
Applications of the Kaizen Model in the Current Crypto Market
In 2017, talk of the potentially revolutionary nature of blockchain technology hit its peak and expanded to a larger segment of the business community and the general public, driven by inappropriate media coverage. Blockchain was portrayed as a miracle cure to virtually every known problem in the world. Asset prices of companies proclaiming to use this new technology surged — regardless of the stupidity of or the seriousness behind their propositions. Some corporations, like the Long Island Iced Tea Corp., merely changed their names to include the word “Blockchain” and saw their share price soar. Thus prices were almost exclusively composed of DEUV, which was in turn predominantly driven by sheer limitless expectations of the new technology.
Even today, Bitcoin and altcoin prices are moving very much in sync. These high correlations are proof that investors are failing to appreciate significant differences between projects.
With the correction in 2018, enthusiasm has waned and so have DEUVs and prices. Going forward, we will see projects thrive that manage to create actual utility value. We will see certain subsegments experience adoption faster than others. We will see new, but more selective Hype Cycles. Consequently, different sub-segments will fare better than others. Investors will recognize this and correlations between crypto assets will gradually decrease. This changing market environment will create new challenges but also new possibilities for investors.
Let us know what you think about the Kaizen Model.
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