Why It is Important to Convert Speculators to Users
Sometimes, discussing issues related to price can be petty and perhaps subjective. Speculators are experts at doing this, and expectedly, they get a lot of backlashes doing so. Most times, with this game of speculation, investors are often misled, distracted, and lots of unnecessary noises are made concerning projects.
Notwithstanding, the impact of price on cryptonetworks and by extension, the blockchain industry cannot be underestimated. Any attempt to zoom into cryptonetwork management without giving due consideration to the prices can indeed be counterproductive. It compares to engaging in the building of an aircraft without putting the effect of the wind into consideration. However good the mechanics of the aircraft is, it would not make the project a success judging by the fact that the environment it would work was not factored into it.
Granted, bull markets that are euphoric are havens for speculators, click-bait, and scammers. But with all these, they still come up with authentic projects and genuine believers who, if not for them, would not have had any crypto experience. As it goes, genuine market corrections delete bad actors although it also reduces the available pool of actors from which projects can either find users or hire.
In this piece, we shall x-ray a hypothetical framework to help understand the association between the composition of cryptonetworks and prices. The basis for the submission that would be shared here would be predicated on the famous George Soros reflexivity theory. Other startup concepts for growth such as churn and activation would also influence the opinion shared here.
Definition of Some Key Concepts
It is good we explain some of the key concepts that were used in coming up with the model presented in this piece. As such, we would start by explaining them in order.
- Fallibility and Reflexivity
According to Soros, reflexivity shows just how a person’s perception can make fundamentals. In his words, it is common wisdom. The concept is, however, notable due to the possibility of information being imperfect. And when such happens, several business fundamentals which most economic theories have not paid much attention to are seriously influenced.
To explain what reflexivity means, Soros cited the example of drug addicts being treated as criminals. He posited that the behavior only succeeded in creating more criminals because according to him, such thinking misconstrues what the real problem is and, therefore, hinders the right treatment of the addicts.
When applied to cryptocurrency, the reflexivity concept is highly relevant particular in situations where a common valuation has not been created, and information available is quite imperfect. Last year April when Ethereum was having its bull run, Joshua Seims of Metastable Capital said in a written statement:
“Of a truth, what happens next year at the market would prove whether this cycle is efficient or not. As a result of an upsurge in price, a number of speculators were gladdened and showed interest. This ensured that this cycle continued to be pumped. But even from the cycle, it is obvious that reflexivity can apply the other way round too.”
In the words of Chris Burniske and Jonathan Cheeseman which was published in April 2018,
“Turning to the current bear market, we can divide the loss in network value thus far in 2018 by the estimated tax liability outflow, to define a maximum fiat amplifier. Dividing the $590bn drop from early January highs to present, by our estimate of $14bn net outflows, yields a maximum fiat amplifier of 42x.”
In their views, a “fiat amplifier” stands for cryptomarket’s reflexivity. If it goes in the right direction, one fiat amplifier takes a fiat that is worth $1 and returns it with $X in which case; the X has increased in market cap. Nevertheless, if the amplifier swings in a negative direction, $1 out can lead to a $X market cap decrease.
The significant drop in the price of Ethereum would perhaps best explain what reflexivity is all about. Although one cannot completely leave aside the fact most ICO projects were being coerced into selling their treasury bills denominated in ETH, the example is no less useful and easily comprehensible.
- The Growth Loop or Funnel
This is another concept that needs to be explained. It is also known as growth loop. The concept can be represented in several ways but whichever way one represents it, it puts forward three things which are the acquisition, activation, and retention of users.
By acquisition, we mean how new users are attracted. Activation refers to how the new users acquired are convinced to take a course of action. By retention, we mean how the user that has been activated get convinced to give back.
In all of these, the aim is to guard against churn which is a situation where users opt out from the network. Of course, churning can take place at any of the stages
The Coin Price Flywheel
The idea of the “Coin Price Flywheel” concept is to present a framework which would help to understand how prices affect cryptonetwork’s composition. Yes, how the loop goes depend largely on reflexivity. Also, growth funnels earlier discussed dictates transitions from a step to another.
- When the Flywheel is up
Here are a few things that take place to the flywheel when prices increase
- Most cryptocurrency prices increase
- Speculators are significantly attracted
- Many of these speculators eventually convert to users
- This leads to further confidence in the crypto
- Eventually, the end result is the increase in the cryptos’ price.
This trend continues that way. However, the determinants of the flywheel’s speed and when it stops spinning are of many variables. Each of these stages can make up a thesis in themselves.
Nevertheless, one important means to view flywheel progression is using the growth loop or funnel. This, in essence, says that the effectiveness or otherwise of the flywheel rests on how you are able to convert in each of the stages.
For instance, to answer the question of what determines the number of speculators that would be gotten as a result of a price increase of 1%, acquisition explains that. Better still, the more your user experience becomes authentic and reliable, the more your acquisition rate increases. One way to improve users’ experience is to regulate stablecoin.
When pondering on the number of speculators that would eventually convert to users, activation comes into play. Here, you would be enlightening and encouraging speculators to use crypto. In translating belief into action, “The Narrative Bubble Loop” takes center stage.
Flywheel transitions like this allow stakeholders several authentic means of improving a cryptonetwork. As the transition becomes more effective and bootstrapping any network becomes quite easy.
- When the Flywheel Goes Down
Conversely, when prices go down, the flywheel changes or goes in the opposite direction and the following things happen
- The confidence of investors in the crypto drops
- This leads to a reduction in the number of users
- Speculators too are scared
- With time, even speculators abandon the coin
- This, no doubts would make the price to decrease further.
Of course, this process keeps going on. And like when the flywheel is up, the most important factor here is the transition key. However, in this scenario, your goal would be to bring down transition rates one stage at a time.
Bear in mind that the stronger the movement of mass around your network experiences, the more negative impact your price would have on speculators’ belief. An example of this was the developer community of Ethereum. ETHGlobal developer meetups didn’t even feel the huge decrease in price.
Whether users and speculators would churn actually depends on the usefulness of the crypto itself. If the utility is abysmally low, when the flywheel is down, users will not be interested in holding on to it. However, if it has become part and parcel of them, and they value it immensely, you can expect that churn rate to be minimal.
As it is, the only way to motivate stakeholders when the flywheel is down is to dampen reflexivity. Reflexivity is, however, directly proportional to the churn while the churn is also proportionally directed to the division of speculators to users
The model put forward here is tagged flywheel model, and it assists in knowing how movements in price affect the fundamentals of cryptonetwork. It posits that instead of following the tradition trend of dismissing the effect of price, the best way to go is for projects to manage flywheels to address any negative effect effectively. In all, the model encourages steps that would turn speculators into users as this alone would help to increase usage.