When crypto assets generate returns and stocks become collectibles, it's a major shift in valuation logic.

Author: Matt Harris

Translation: Tim, PANews

At a dinner last summer, someone mistakenly thought I was in finance and asked me a question about the art market. Although I am not an expert, I answered from the perspective of a venture capitalist. In the end, I barely explained how the art market operates and how it differs from the markets I have studied throughout my life.

However, these questions have been lingering in my mind. Why can I be well-versed in one market but feel unfamiliar with another? Can assets cross between these two markets, or are they forever stuck in predetermined valuation models?

Two Types of Markets

Each market is answering the same question, “What should it be worth?” but the underlying logic is quite different.

Cash Flow Markets are essentially a math problem. Whether it’s a stock or a bond, value equals the present value of future cash flows discounted. These markets are large, highly liquid, and mostly self-correcting. Mispricings will eventually be arbitraged away, although sometimes this process is slow enough to test investors’ patience or even make them stop taking your calls.

Sentiment Markets are a game of chasing market sentiment. Prices are not based on future earnings but on what the next buyer is willing to pay, which in turn is based on their guess of the next buyer’s expectations. It’s like being in an infinite hall of mirrors: art, luxury watches, wine, NFTs, Meme stocks, and (depending on your beliefs) Bitcoin are all in this category.

These two types of markets each have their own internal logic: one measures future cash flows, the other measures collective belief. Most of the time, we assume they are clearly separated, but reality is blurring the lines between them.

When Cash Flows Turn into Narratives

Traditional finance always prides itself on being driven by rational analysis rather than emotion, but over the past twenty years, this boundary has gradually blurred. In public stock markets, the Meme stock phenomenon has turned stocks into collectibles. Take GameStop, for example; its value now lies somewhere between baseball cards and Basquiat paintings.

Public equity markets are gradually giving way to private equity. Here, valuation power often resides with a passionate buyer rather than the crowd. Similar trends are emerging in credit markets, with capital shifting from public to private sectors: more negotiation, less transparency, and more divergence in investment outcomes. This leads to lower liquidity but also reduced volatility, and paradoxically, final transaction prices often end up higher.

Moreover, the private markets have slowly evolved into narrative arenas, where each funding round is like a revision of the same story. As investors, we romanticize this as “long-termism,” but it actually leans toward uniqueness and subjectivity. Private market participants still provide quotes based on future cash flow analysis, but (with the proliferation of AI) soon everyone will have access to homogeneous AI-generated models. The only difference will be the story you tell GPT before hitting send. The beauty of private market investing is that the real value only manifests after the investment is made: unlike public market investors, private equity and venture capital firms can actively manage and participate in making the story come true.

When Narratives Turn into Cash Flows

Meanwhile, some historically sentiment-driven sectors (such as cryptocurrencies) are evolving in a completely different direction.

Bitcoin was initially a purely sentiment-driven digital collectible, not relying on future earnings expectations. Ethereum, DeFi tokens, and RWA projects are gradually moving toward the other end: they start generating cash flows, offering staking yields and collateral returns. Today, more and more crypto assets have observable cash flows.

The composability of on-chain financial instruments turns ownership, trading, and settlement into native software functions, making cash flow markets potentially more efficient than public stock markets. They offer 24/7 continuous liquidity, instant settlement, and fully transparent ledgers.

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

The rise of prediction markets is bringing another highly specialized market into mainstream view. When insights into future trends shift from cash exchanges in back alleys to real-time digital markets, new possibilities emerge. Betting on election outcomes before results are announced is a popularity contest, but when combined with “investments” in regulation-sensitive stocks, it can serve as a hedging tool to optimize portfolio risk-return ratios.

Three Levels of Markets

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

1. Underlying assets (the objects owned)

2. Ownership certificates (tokens or financial instruments)

3. Trading infrastructure (the platforms and rules for trading)

When assets shift between categories—for example, from private to public, or from physical to digital—it is often because one of these levels has changed. Privatization alters the trading level; tokenizing artwork via NFTs changes the ownership certificate level; on-chain RWA projects change all three levels simultaneously. Changes in these levels often significantly impact who is qualified to participate in the relevant markets and influence valuation.

This layered structure helps explain why rapid experimentation with market structures is happening now. Technology enables us to deconstruct and reassemble “markets” through software—sometimes with higher liquidity, sometimes with lower—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, creating an evolving landscape where traditional market forms and new mechanisms intertwine.

Liquidity as a Double-Edged Sword

Liquidity has become a cultural value in finance, even regarded as a guiding principle. But more is not always better; like a double-edged sword, excessive liquidity can hide unseen currents.

In sentiment markets, high liquidity often means high volatility: prices are continually re-evaluated without stable valuation anchors. In cash flow markets, liquidity facilitates efficient capital allocation and transparent risk transfer. We need to carefully distinguish the essential differences between these two.

We can establish this connection: the more a market’s value depends on modelable cash flows, the safer its liquidity becomes; conversely, when value relies more on narratives and scarcity, moderate low liquidity can serve as a stabilizer. This low liquidity can prevent “pricing populism,” avoiding the influence of market participants with the least professional knowledge from setting asset prices.

Convergence, but Not Conflict

The dominant theme of the 20th century was standardization—transforming special assets into tradable securities, assigning identifiers like CUSIP (the American Securities Identification Code), making more things investable. The 21st century may shift toward re-personalization—building deeper, broader, more diverse markets that can be synthesized and combined, enabling more efficient and targeted investment exposures.

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

Traditional binary classifications—public vs. private, interchangeable vs. unique, speculative vs. productive—are dissolving. We are moving toward a continuous spectrum from purely sentiment-driven to purely cash flow-driven assets, with most assets distributed along this spectrum and traded within a liquidity continuum from absolute liquidity to contractual trading.

Market Insights

Ultimately, markets reflect motivation. Some markets reward productivity, others reward collective belief.

Throughout history, we have often separated these two: finance is rational, art is romantic. But technology is forcing their fusion, revealing a spectrum between rationality and narrative, which is the fundamental backdrop of all value creation.

Our task as investors, entrepreneurs, and regulators is not necessarily to defend one logic and dismiss the other, but to design systems that can accommodate both measurable and unknowable dimensions, preventing either side from dominating the balance.

Because, at the end of the day, every market is a contest for asset attractiveness. Some of these contests ultimately translate into cash.