Crypto Hype-Innovation Flywheels
JUly 29TH, 2020
If we look back at the history of crypto, we see a pattern emerge of the space evolving in flywheels. Each flywheel is characterized by 1) price hype and speculation peak, which leads to 2) increased social and media buzz about the sector, which leads to 3) more developers and teams entering the sector, which leads to 4) exciting new startups and ideas, which drive the next stage-1 price and speculation peak.
There have been three such flywheels to-date, with their stage-1 price and speculation peaks occurring in 2011, 2013 and 2017. We see this cycle play out in the data when we look at the number of crypto ecosystem projects launched in a given year. There are clear increases in the number of new projects following the 2009, 2011 and 2013 price peaks.
Following the 2017 price peak, we saw an even larger overall increase in new projects. We also saw an increase in projects focused on financial market infrastructure, making crypto's ability to frictionlessly absorb new capital orders of magnitude easier as we enter into the next stage-1 of the flywheel. While many outside the industry spent the past three years cheering its demise, the talent attracted by the 2017 stage-1 has been quietly yet doggedly building institutional-caliber custodians, execution venues, derivative markets, prime services, institutional lending platforms, asset management products, fiat onramps and settlement networks.
a16z defines the stages of the crypto flywheel a bit differently, but recognized the same general cycle and analyzed each stage of the cycle since the beginning of the first flywheel in 2009.
The data confirms each stage of the flywheel. Price peaks first, followed by media buzz, followed by developer activity, followed by startup activity. It is this well defined pattern in conjuntion with the dramatic increase in quality of projects aimed at insitutional investors following the the 2017 price peak that makes me very optimistic about the future of crypto, especially over the next 1-2 years as we enter the stage-1 of the next crypto flywheel.
Stay tuned and buckle up!
