Speculative Bubbles in the 21st Century & Asymmetric Upside

There's a large percentage of people today that like to complain about new asset paradigms that accrue financial value at a rapid pace and then loudly dismiss them as bubbles and their participants as moronic, bad, or opportunistic (in a bad way). This is often done in an intellectually lazy way and perhaps shrouded in the possibility that a part of these people are jealous about "easy money" being made by those exploiting this parabolic rise of the given asset.

I have heard this repeatedly about crypto over the years, a decent amount about technology broadly prior to 2020, and a lot about NFTs recently. We likely will also hear this again about portions of technology (like comp bio and other deep tech) as companies go public earlier, and fail publicly later.

Admittedly, I thought a bunch of the ICOs in 2017 were a joke, I don't believe that many of the NFTs today will hold value, I don't find the asset price increases of meme images intellectually interesting, I think a lot of these “communities” are overrated, and despite being a beneficiary financially of this movement, I am a bit mindblown/bothered at the wealth creation I have seen from some who have little depth of thought applied to their investment practice (the past few years in venture has allowed me to get used to this and find peace despite this).

However, despite the eventual drawdowns of various "overpriced" assets, there are always still valuable lessons and understandings to take away, and lots of tangible wealth created (and destroyed).

With all of that out of the way, there is something that instead I would like to make clear for those looking to analyze the continued emergence of waves of speculative bubbles:

This behavior will fundamentally not stop and it is far more valuable to suspend disbelief in order to reach a core understanding of the bull case, than play devil's advocate to tear down a partially flawed, overbought, or misunderstood asset.

This might not be an uncommon opinion on the surface, however upon many conversations, the why is often misunderstood. In gut checks on why people believe this is happening today, many point to reasons of generational shift, capital market stages, or coordination layer/influence layer of the internet. This dynamic in asset classes and markets broadly is not about age, wealth, and likely less about interest rates than we think. While the internet has certainly impacted the scale and pace of change, the core driver instead hinges on a fundamental shift to how people understand and underwrite risk (yes i know as interest rates lower, returns accrue further out on the risk curve).

I've discussed this before in a longer tweetstorm but Asymmetric Upside is a concept that was poorly understood by most up until the past decade or so.

The dramatic rise began with Facebook, The Social Network, Unicorn culture, and the dramatic expansion of angel investing and early-stage capital formation.

It progressed with crypto which lowered barriers to entry, expanded transparency, and had latent network effects that is likely thus far the largest vehicle of wealth creation ever.

It now has manifested itself in a widespread mentality that has only exploded in adoption as distribution of both the actual opportunities, and the stories of these wealth creation events, has opened up.

Each time a new asset class (NFTs) or tool (Robinhood last year) enable the longer tail to participate in parabolic move, leading to a wider cohort of people who experience Asymmetric Upside first-hand, only to become lifelong believers.

Where novel speculative assets previously lived in various networks of the world, largely inaccessible, today they are accessible via digital primitives (on-chain or not) which leads to a dynamic where any asset with an asymmetric upside risk profile that can be quickly exploited or "aped into", will be.

The First Movers will always be a small scale (though larger than in non-digital primitive times) that discover and believe in (or create) a certain narrative about the asset. Today this cohort is larger both because of wealth creation in the past decade, increased time due to lockdowns, as well as the aforementioned lowered barrier to entry.

The Next Movers will show that the TAM of investors for these assets will then expand at a faster and faster rate as people begin to understand the given meta for the given investment game they are playing (short squeezing out of morals GME stock, scarcity or cultural relevance for an NFT drop, fixed-income style value accrual a la Loot and AGLD, and on and on metas will evolve).

These metas are proliferated or created by the First Movers, but at times can be adopted/transformed by the Next Movers.

The final two movers will likely be laggards with material capital (potentially marking a top, or creating a new cycle that prices in far more risk and upside, compressing return profiles) as well as those with minimal capital that benefit from the fractionalization of a given asset as the first movers seek distribution (to perpetuate narrative, driving up value) or an exit (to offload liquidity risk).

A pull back in the bull market may lead to some people churning out or progressing from one part of the speculation stack to another (think about how many denounced crypto after 2018, only to become late movers in this last cycle). It is also possible that this aggressive investing behavior (and thus the inevitable aggressive losses) could destroy asset classes faster than ever before (back to our previous example, there are a number of people who still say they will never buy crypto today after being “rugged” either literally or metaphorically).

It is likely these cohorts will bounce from asset to asset until either regulation and/or a wealth inequality gap widens to the point that these zero sum games become impossible to play.

I've very publicly been a skeptic of momentum style assets, companies, or investments in the past, and I still believe there is material value in this hole-poking analysis in order to be able to move in and out of speculative bubbles. That said, the true value in understanding both cases in this type of capital market environment is to instead have the conviction to be fine not participating in short-term, parabolic cycles of wealth creation, in exchange for a focus on long-term value creation (these are not mutually exclusive).

Credit: Icebergy for this super cycle chart

Ultimately, as this behavior continues to super cycle across all participants in capital markets, we will continue to see emergent events that don’t pattern match to prior primitives. Metas of investing in existing, more mature asset classes will evolve or look entirely novel, while newer asset classes will cycle through many primitives quickly. Because of this, as an investor, conviction in your process and understanding of your time horizon will be more important than ever.

But in the end, perhaps what will mark investing in risky asset classes in the 21st century won’t be the optimization of a specific process or approach, but instead the ability to be novel and adjust to these dynamics over time.