J-curve in the field of Cryptocurrency


With the development of the cryptocurrency market, we have already experienced not one drop and take-off, following the activation and extinction of interest in cryptocurrencies. These downturns and ups are an integral part of the way to the top.

Bitcoin has already gone through several cycles of growth / recession, the most notable of which is a sharp rise in 2013, when amidst growing enthusiasm, bitcoin first crossed the mark of $ 1,000, and the subsequent drop to a minimum of $ 175, which dragged on until January 2015 . At the time of this writing, bitcoin is confidently moving towards the $ 4,000 mark, so only in 2017 the price has increased almost 4-fold, which confirms another period of a surge of enthusiasm.

For crypto assets with actual value, these ups and downs form a price chart resembling the well-known pattern: the J-curve.

In private equity, the J-curve refers to the cash flows of the portfolio, whereas in the economy it is usually used to describe the effects of currency devaluation on the national deficit. In cryptography, a new J-curve appeared.

The main idea of ​​curve J stands on how the market evaluates crypto assets in the aspect of time. As I said at the Token Summit, I believe that the price of crypto assets consists of two types of value: “current useful value” (CUV) and “discounted expected useful value (DEUV)”, the last one is called speculative value. (Note: the term “speculative value” can only be used in a negative light if someone also believes that the prices of most high-growth stocks mostly consist of “speculative value” around future cash flows).

During trading, interest in crypto assets is usually quite high, so for some time, growth continues. At such times, the CUV of the asset is the minimum part, or even does not exist, if there is no corresponding protocol. Then the asset basically consists of DEUV, because of what almost 100% yields to the whims of Mr. Market. In the chart below, you can see that this initial period of great enthusiasm is the first high point of the crypto J-curve.

It is worth noting that, on the presented graph, “High% DEUV, low% CUV” (“high% DEUV, low% CUV“) refers not to the absolute value, but to the percentage. From my work on the evaluation of various crypto assets, I can say that there is nothing strange in seeing that the structure of prices looks the same as in the first days. Initially, the inflated price is initially exaggerated DEUV.

During the development of crypto assets, the development team and the entire crypto community face some difficulties. It is difficult to create distributed systems, but it is even more difficult to manage people inside such systems. Therefore, enthusiasm disappears, which affects DEUV. Purely mathematically, DEUV compression can lead to such variants:

  • an increase in the discount rate, since the chances of success are considered smaller, which makes the assets more risky;
    a decrease in the percentage penetration of the target asset market, as there are fears that the protocol will not support as many people as anticipated at the beginning;
    reduction in the common address market, as the points of the “road map” and the planned functionality begin to seem unrealistic.
    Think what you want, but as soon as the hard speculations are over, DEUV will be smeared on the wall, and with a small current useful value and the price of the token will drop rapidly. Ask any bitcoin about 2014 and you will find out that this was not the most successful year.

But, a group of special developers will wait humbly and do not pay attention to the vagaries of Mr. Market. In consequence, the protocol is improved, and more users (not speculators) will join it.

If the use of cryptocurrency is growing, then the CUV of cryptoactive is slowly but surely growing.

CUV can grow even if the DEUV token continues to fall. If there is a strong bearish trend on the market, the price of the asset can reduce DEUV to almost zero, leaving only CUV, which could lead to a sharp decrease in the price. In the long term, the market can even discount the asset to the point of trading below CUV, which is a bit like the exchange trade at book value.

Nevertheless, often over all developers, users and even a wide “community” hangs a group of tough investors, which is a tape DEUV, which once was (see below). I’m sure that’s exactly what happened with bitcoin during the first three quarters of 2015, as the price was $ 200. This is the lower point of the J-curve.

The rise from the bottom of the J-curve graph can be a rather slow and protracted process. The curve will begin to grow right after Mr. Market wakes up and sees an increase in the CUV price of this asset, increasing the share of DEUV in the total price. Such a process is the complete opposite of the above-mentioned three, because, in all likelihood, the discount rate is decreasing, the expected penetration into the target market is increasing, or the optimism around the general address market is growing. However, in fact, DEUV expands, as expectations about future value grow on the basis of the growth of CUV. The following graph shows how these processes took place with bitcoin from the beginning of 2013 to now.

Then everything can develop in different ways and at different rates. At best, CUV and DEUV will grow together, finding balance. But still, most often, especially in bull markets, DEUV begins to quickly outpace the growth of CUV. Then the speculators return, which quickly increase the DEUV, thereby increasing the distance between numbers and reality. That is why in the crypto sphere the J-curve, as a rule, is growing rapidly at the last stages.

At this point, the cycle ends. Initially, the cryptoactivity consisted entirely of DEUV, then descended to the bottom of the bear market and was based solely on CUV support before re-building DEUV. Below you can study the structure of the price of crypto-active as a percentage for the whole period.

The J-curve through the price demonstration shows the mood in the market. When expectations are initially high, the price is also at a high level, but in the same way, in most cases this price is DEUV. Once false expectations begin to disperse, the price also falls, even if the CUV increases. Ultimately, since DEUV is expanding again, the price of the asset should exceed its previous high, because the CUV support also grows.

In other words, the higher the present value, the higher the discounted expected value. In the coming years, we can expect tough bull trends in the markets.

 Then, the cycle begins again and happens again, and again, and again. I’m sure that on both the macro and micro levels, we expect many more J-curves, the difference is only in time frames. In the case of the macro-level, I tend to decades. Each next DEUV highest point will be weaker than the next, creating a new J-curve. This J-curve will consist of a set of micro J-curves, the periodicity of which is still difficult to determine.

Ultimately, in a stable state, the cryptocurrency should consist mainly of CUV, with a small amount of speculation taking place on the edges of the industry. At this stage, the J-curve, repeated every 10 years, should begin to exacerbate, eventually becoming an S-curve. The number of future speculations around the value of assets will depend on the coverage of the target market and the stability of the protocol. Of course, all this is just a theory, so do not expect the appearance of ideal models and graphs in real life. But, while utility in the long term grows, we will move forward towards the goal.

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