When crypto assets generate returns, stocks become collectibles, marking a major shift in valuation logic.

Author: Matt Harris

Compiled by: Tim, PANews

At a dinner party last summer, someone mistook me for someone in finance and asked me a question about the art market. Although I'm not an expert, I answered from a venture capitalist's perspective. Ultimately, I managed to explain how the art market operates and how it differs from the markets I've studied my entire life.

However, these questions have been lingering in my mind. Why am I so familiar with one market yet feel so unfamiliar with another? Can assets move between these two markets, or will they forever remain trapped in established valuation models?

Two types of markets

Every market answers the same question, "How much should this be worth?" But the underlying logic is different for each market.

The cash flow market is essentially a mathematical problem. Whether it's a stock or a bond, its value equals the present value of future earnings streams discounted to their present value. These markets are large, highly liquid, and mostly self-correcting. Mispricing will eventually be smoothed out by arbitrage, although sometimes this process is so slow that investors lose patience and may even stop answering your calls.

The sentiment market is a game of chasing market sentiment. Commodity pricing doesn't depend on future earnings, but on the price the next buyer is willing to pay, which in turn is based on guessing the psychological expectations of the next buyer after that. It's like being in an infinite hall of mirrors: art, watches, wine, NFTs, meme stocks, and (depending on your beliefs) Bitcoin are all included.

These two types of markets each have their own inherent logic: one measures future returns, while the other measures collective beliefs. Most of the time, we assume they are clearly distinct, but reality is blurring the lines between them.

When cash flow becomes a narrative

Traditional finance has always touted itself as driven by rational analysis rather than emotion, but over the past two decades, that line has become increasingly blurred. In the public stock market, the phenomenon of meme stocks has turned stocks into collectibles; for example, the value of Game Stations lies somewhere between baseball cards and Basquiat artwork.

The public equity market is gradually giving way to the private equity market. Here, pricing power often rests in the hands of a single enthusiastic buyer, rather than a group pricing strategy. A similar trend is emerging in credit, with funds shifting from public markets to private equity: more negotiation, less transparency, and greater divergence in investment outcomes. This leads to reduced liquidity, but also decreased volatility; paradoxically, the final transaction prices are often higher.

Furthermore, the private equity market has gradually evolved into a narrative arena, with each round of financing resembling a revision of the same story. As investors, we romanticize this as "long-termism," but it actually leads to uniqueness and subjectivity. Private equity market participants will still offer quotes based on future cash flow analysis, but (with the proliferation of AI) soon everyone will have homogenized AI-generated models. The only difference lies in the story you tell GPT before pressing enter. The beauty of private equity investment lies in the fact that it only truly begins to emerge after the investment takes effect: unlike public market investors, private equity and venture capital firms can actively participate in the process of making the story come true through active management.

When narratives are transformed into cash flow

Meanwhile, some sectors that have historically been driven by market hype (such as cryptocurrencies) are evolving in drastically different directions.

Bitcoin initially emerged as a digital collectible driven purely by market hype, unrelated to anticipated future returns. Ethereum, DeFi tokens, and RWA projects, however, are gradually moving in the opposite direction: they are beginning to generate cash flow, offer staking rewards, and collateral rewards. Today, a growing number of crypto assets possess observable cash flows.

The composability of on-chain financial instruments transforms ownership, trading, and settlement into software-native functions, making cash flow markets potentially more efficient than public stock markets, offering 24/7 uninterrupted liquidity, instant settlement, and a fully transparent ledger.

In other words, cryptocurrencies are evolving from a speculative narrative into a new form of programmable finance. Meanwhile, traditional assets are drifting in the opposite direction, moving away from liquidity and transparency and towards scarcity and narrative-driven approaches.

The rise of prediction markets is bringing another highly specialized type of market into the mainstream. As insights into future trends shift from cash deposits in alleyways to real-time digital markets, new possibilities emerge. "Beting" on election results is a popularity contest before the outcome is revealed, but when combined with "investing" in regulatory-sensitive stocks, it can become a hedging tool for optimizing the risk-reward ratio of a portfolio.

The three levels of the market

Every market, regardless of its operating logic, is built on three levels:

1. Underlying assets (the objects being owned)

2. Ownership certificates (tokens or financial instruments)

3. Trading medium (the infrastructure and rules for conducting transactions)

When assets shift between different categories, such as from private to public, or from physical to digital, it's often because one of the layers has changed. Company privatization alters the transaction layer; tokenizing artwork through NFTs changes the layer of ownership certificates; and RWA's on-chain operation changes all three layers simultaneously. These changes often alter who is eligible to participate in the relevant market, and consequently, significantly impact valuation.

This hierarchical structure helps explain why we are seeing such rapid market structure experiments. Technology allows us to deconstruct and reconstruct "markets" through software, sometimes with higher liquidity, sometimes with lower liquidity, but always accompanied by new combinations of narrative logic and analytical paradigms. This programmability expands the boundaries of traditional trading and redefines the possibilities of market participation, forming an evolutionary pattern in which traditional market forms and new market mechanisms intertwine.

Liquidity is a double-edged sword

Liquidity has become a cultural value in the financial field, even regarded as a golden rule. However, it is not always better to have more; like a double-edged sword, excessive liquidity also harbors unseen undercurrents.

In sentiment-driven markets, high liquidity often translates to high volatility: prices are constantly being revalued, yet there's a lack of stable valuation anchors. In contrast, in cash flow markets, liquidity facilitates efficient capital allocation and transparent risk transfer. We need to carefully distinguish the fundamental differences between these two markets.

We can establish this correlation: the more market value relies on modelable cash flows, the safer its liquidity becomes; conversely, when value relies more on narrative and scarcity, moderately low liquidity can act as a stabilizer. This low liquidity can prevent "pricing populism," that is, prevent asset prices from being determined by the least knowledgeable participants in the market.

Convergence, but not conflict

The dominant theme of the 20th century was standardization, which involved transforming specialized assets into tradable securities and making more things investable by assigning CUSIP codes (Uniform Securities Identifiers) to them. The 21st century, however, may shift towards re-personalization, building deeper, broader, and more diversified markets that can be synthesized and combined to achieve more precise and targeted investment exposure with greater efficiency.

Today, we can create financial instruments with personalized economic attributes while maintaining liquidity at the execution level. Whether it's tokenized credit, online prediction markets, or programmable securities, they all point to a more continuous, transparent, and flexible market architecture that is far more advanced than any previous form.

Traditional binary classifications—public versus private, interchangeable versus unique, speculative versus productive—are blurring. We are now facing a continuous spectrum ranging from purely emotional to purely cash flow-driven, with most assets distributed across it, trading within a liquidity spectrum ranging from absolute liquidity to agreed-upon transactions.

Market Implications

Ultimately, markets reflect motivations. Some markets reward productivity, while others reward collective beliefs.

Throughout history, we have mostly separated the two: finance is associated with rationality, and art with romance. But technology is forcing them to merge, revealing in the process the spectrum between rationality and narrative, which is the fundamental basis of all value creation.

Our task as investors, entrepreneurs, and regulators is not necessarily to defend one logic while rejecting another, but to design systems that can accommodate both the measurable and the unknowable dimensions, preventing either side from gaining the upper hand on the scales.

Ultimately, every market is a competition for the attractiveness of assets. It's just that some competitions eventually translate into cash.