A few months ago, I had lunch with a former trader who told me: “This is my third asset class. I have traded commodities, then derivatives and now it is crypto. However unlike the precedent waves, Wall Street is late to the party and early investors are very different. They are very technical and sometimes often see crypto/decentralization as a religion. They don’t want a yacht or a Lambo; They want to hodl their tokens.”

I think he was right. We are at the birth of a new asset class. As Andreessen Horowitz puts it, “cryptocurrencies are a new asset class that enable decentralized applications”. Or something like that. Some much smarter people than me like Chris Burniske and Adam White already wrote about the birth of the new asset class few years ago.

In this post, I highlight the different stages of the birth of the crypto asset class through a simple framework of technology adoption. In a second post (to publish on Medium during the last week of December), I shall discuss why institutional investors are keen on crypto. Finally. I address the adoption challenges for institutional investors.

Paradigm shift->Believers->Converts->Speculation->Retail FOMO->Institutional money->BURST

First there needs to be paradigm shift, a fundamental change in approach, such as the advent of a new technology. Here comes “How blockchains could change the world”.

The first adopters are called believers. This group believes that the new paradigm has a massive potential (i.e. the internet or the blockchain technology). They are not just driven by the potential financial upside but really believe in the technology and want to prove that the technology works. Some examples of blockchain believers include Nick Szabo, Hal Finney and Gavin Andresen.

Once the technology / paradigm shifts have shown proof that it works, the product-market fit stage begins. Interestingly, this period in crypto is associated with a pricing discovery phase as tokens are traded on public market 24/7. However, as the asset class is new it lacks a proper valuation framework and robust offer/demand. Investors try to use combinations of past approaches (quantitative, qualitative), but this discovery phase can take a long time.

During this phase, converts start to appear. The first converts fall often into two buckets: young professionals and high net worth individuals (HNWI). Both have a high risk appetite and high intellectual curiosity. The first group is looking to build the infrastructure to support the new technology, such as Fred Ehrsam and Brian Armstrong founders of Coinbase, or Juan Benet, founder of Protocol Labs. The HNWI invests in new companies or in this case tokens with a long-term view of the potential upside and can bear costs of failures. Some examples include Chamath Palihapitiya, Mike Novogratz and Naval Ravikant.

Soon after, the smart money starts to be interested and invests in both companies and token. By smart money, I refer here to investors with habits to take bets on new technology such as VCs (such as USV, A16Z) or hedge funds that make a living by managing risks. Note that with regards to bitcoin BTCUSD, +0.88% , quantitative hedge funds (e.g. Jump Trading, DRW) were actually the “real” smart money as they combine a strong technical and institutional investing background.

The growing interest fosters a rapid rise, aka speculation phase (the total crypto market cap grew in 2017 by 37.2 times — enough for making anyone a hedge-fund star). However, most investors at this point lack an understanding of the technology and valuation framework (there are 2.7 million results for “How to value Bitcoin” on Google), causing polarizing views on pricing and about the legitimacy of the asset. Look at the cool Bulls & Bears tracker.

However, speculation continues to drive further interest and raise awareness among a larger portion of market participants. New investors launch dedicated investment vehicles to profit from the rapid growth. You are not alone, my crypto hedge-funds friends. There 100+ crypto funds like you. Note, the majority of these investors understand that prices are abnormal but the fear of missing out (FOMO) and “easy money” make it hard to resist. Everyone wants a Lambo. Everyone wants to be a crypto millionaire.

However, the speculation phase is needed for long-term adoption. As Joel Monegro from USV puts it: “Speculation is often the engine of technological adoption”. The more people are aware of crypto/decentralization, the better it is. New entrepreneurs will try different token launches, governance models, consensus mechanisms, etc… Yes. most of these trials will fail, but this is exactly the point. The velocity of trials increase exponentially with speculation which in turns allow more success and failures.

In the previous speculation phases (e.g. internet), the retail market was the last to be able to invest/participate in the advent of the new asset class. However, for crypto, Wall Street is the last one.

This “irrational exuberance” can persist for years but eventually bursts due to a vast range of factors including regulatory, idiosyncratic or macro drivers, causing prices to precipitously decline before stabilizing at more reasonable levels.

Post-burst, the vast majority of profit may disappear but the technology is here to stay and the number of converts have reached a point of no returns. The final phase is driven by builders referring to converts working on new companies with a more sustainable business model and using past knowledge.

As of December 2017, we are right in the speculators phase. Everyone buy crypto. Everyone is making profit. Even my 85+year-old granddad has a strong crypto investment track record. Everyone seems to have a friend who is doing crypto day trading and now is a millionaire. But no one really knows what is a coherent product market fit for the technology and if the tech can actually support real-world use cases.

Even the two advanced projects, bitcoin and ethereum, are still in “beta mode”:

• Bitcoin: It has become expensive and slow to transact. Even though the number of transaction grows, it is very far from being able to be a real medium of exchange. The recent forks try to provide alternatives and new updates such as lightning aim to enhance the network capacity.

• Ethereum: The only disruptive-use case ethereum has brought so far is token launch/initial coin offering. It has somehow disrupted early-stage financing. But that’s pretty much it. When people starts to trade/purchase too many “cryptokitties” (a pokemon-style game run on ethereum), the network clogged. Yes. I know. Awkward. But cool updates like lightning, sharding etc.. are soon coming to market.

Today, the limit of the technology is ignored by the level of speculation from the retail/semi-institutional market. A friend from San Francisco told me that he now notices more people using Coinbase on public transports than on WhatsApp, Instagram and Snapchat combined. This is slightly worrying.

A prime example of the retail boom is Coinbase. The firm is now the №No. 1 iPhone app in the U.S. and has exceeded Charles Schwab in total number of accounts. The addition of the new chief operating officer puts Coinbase in a great position to become a next-gen bank/asset manager/broker.

A key developer of bitcoin software is creating a new digital currency

However, the number of crypto investors/hodlers remains somewhat limited. Ari Paul, the co-founder and chief investment officer of BlackTower Capital, recently estimated that the total number of Bitcoin holders is around 45 million people today. Interestingly, if you do a back-of-envelope calculation, I estimate that about $7 billion was invested in crypto ($3 billion+ from crypto funds, $3.8 billion from ICO) without taking into account the retail market. If you assume retail investors invested as much (which seems to be high), then about $14 billionwere invested from fiat to crypto. This is not a lot. When is the real money coming to crypto?

Etienne Brunet is an investment executive at Illuminate Financial Management, a London-based venture-capital firm. Follow him on Twitter @etiennebru. This first appeared on Medium and is republished with permission.