The Crypto Trinity

We are approaching the lowest bottom of the previous crypto cycle, which occurred in approximately November-December 2022. It feels like now is the time to slow down a little, relax, and think about how the current crypto cycle might end. I have an interesting idea and I want to tell you about it.

Necessary disclaimer: I am not a crypto expert or an economist, so I have no clue where the price will be tomorrow or next year. We should all understand that most predictions are completely false. When I say "crypto," I refer to the financial component of the broader Web3 concept (which is about the decentralization of the Internet).

Why does crypto have cycles and why will they continue?

Whether crypto is a commodity (it seems like we've been leaning towards this) or a security (remember 2017-2018), you buy it using cash. The availability of cash and the willingness to exchange it for crypto depends on economic cycles.

As crypto usually lacks intrinsic value (unlike stocks or bonds), its worth is primarily determined by what people are willing to pay. This makes it even more susceptible to psychological factors influenced by narratives spread through media channels.

Ongoing innovation of crypto and Web3 itself, as well as regulatory evolution, introduce new variables and opportunities into the market. If more can be done, new incentives and narratives will continue to emerge, and more people will be willing to participate.

What is the Crypto Trinity?

If I had to describe crypto as a simple system, then the working body is the Token, the transmission is the Traffic, and the engine is the Liquidity.

Tokens incentivize their owners to shape narratives and drive traffic, pulling liquidity into the market, which positively feeds back to continue the process of tokenization of everything (as there is more and more liquidity in the market).

So, a qualified condition for a collapse, trend reversal, or crypto winter occurs when, for some reason, 2/3 of the system's components fail.

On the other hand, crypto thrives most when 3/3 of the system's components are operating well.

That is what the crypto trinity is.

What indicators could we track to observe the dynamics?

The simplest way to do it:

• Retrieve the total crypto market cap on TradingView
• Retrieve the number of created tokens on GeckoTerminal
• Retrieve the number of media artifacts by searching for "crypto" on Google and recording the number of results for each month we need

Sure, this won't be perfectly pure data, but it will be good enough to make a point: they are correlated.

Here is the data I collected. It would be beneficial if someone could gather it for all periods and open-source it so everyone can play with it.

What can go wrong?

Token

There are several reasons why different projects create their own tokens, but the three main ones are:

• to enable a community with some utility
• to distribute some value among community members
• to give a club card to like-minded folks

That is why it is an excellent tool for a community to use. I think that communities have the potential to drive the tokenization process forward.

I see several relatively plausible bottlenecks, and all of them are related to regulations (I'm sure that crypto and web3 experts can come up with many more and probably better ideas):

• Governments implementing stricter regulations or outright bans on crypto
• Safelisting only a certain number of crypto while placing the rest in a gray area to maintain legal leverage
• Forcing mass adoption of "purity proofs" in major centralized services that scan you for dirty transactions (whatever "dirty" means) and can block your transactions or assets
• Outlawing any crypto whose nodes, at least 51% of them, are not located within the country (crazy even for this list, but I'll leave it here)

Traffic

Traffic is an indicator of the amount of attention a thing gets at a time. Attention is what shapes our thoughts and ideas. Our thoughts and ideas translate to actions and behaviors. Our behavior is the main contributor to our state.

This is why propaganda works, technologies play a huge role in modern society, and traffic is crucial for pricing the market.

Because crypto is a young market that is still searching for better use cases and primarily lacks utility, the role of traffic is even more significant.

I see several plausible bottlenecks for traffic in crypto:

• If other superior narratives are in place (like the U.S. election in 2024)
• If the narrative doesn't generate enough optimism to drive people through the obstacles until they buy
• High-profile hacks and thefts that can undermine and destroy optimistic narratives
• Government regulations of crypto influencers that aim to protect users
• Platforms restrictions on crypto promotion content

Liquidity

Cash is king. Whatever your definition of crypto is, you need cash to participate.

Whenever nearly costless borrowing is available, capital is aggressively injected into the financial system, or other conditions lead to people accumulating money they do not need to spend soon, we experience increased consumption and/or liquidity inflow in financial markets.

We all have reasons for keeping our money in our pockets, but we can pretty much guess what might prevent liquidity from rushing in crypto:

• A global recession or financial crisis
• Opportunities with better risk/reward ratio
• Prohibiting the purchase of any crypto from unauthorized brokers to isolate decentralized crypto
• Introducing a "treasure tax" on any decentralized crypto you may have (where you have to give up 50% to the government)
• Institutional investors pulling back due to concerns over volatility, regulatory issues, or disappointing returns

What is next?

It will be quite disappointing if the end result of blockchain is only "digital gold" or, even worse, meme tokens.

The blockchain has seen both wins and losses, but the promises of eliminating central authority (consider the percentage of crypto held by retail investors vs. whales), censorship resistance (consider recent cases involving Telegram and X), and privacy (consider the Tornado Cash case) have not been fully delivered.

Replacing Web2 leaders with Web3 apps and communities is a vast and relatively unexplored area. Many SaaS products could potentially benefit from being translated into the Web3. And the technical side is also ready for new apps.

There is much more to explore and expand. I think it is about time for us to start seeing scaling of the application layer (as technical scaling is no longer the issue).

Bottom line

Crypto has a very limited use cases. However, as more utility emerges from broader use cases (Web3), it could positively impact crypto, making it more solid.

Until then, crypto cycles are mainly the product of free cash in pockets, media advertising and traffic, and people who exploit other people's psychological biases.

I don't know how many cycles we'll see before the financial part evolves into Web3 world. But I'd like to see it.

Thanks for your attention!

👋

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