Author: Matt Harris

Translated by: 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 struggled to explain how the art market operates differently from the markets I have studied throughout my life.

However, these questions have lingered in my mind. Why can I be so familiar with one market while feeling so foreign to another? Can assets cross between these two markets, or are they forever trapped in established valuation models?

Two Types of Markets

Every market is answering the same question, "What should this be worth?" but the logic behind them is different.

Cash Flow Markets are essentially a math problem. Whether it’s a stock or a bond, the value equals the present value of future cash flows discounted. These markets are large, liquid, and mostly have self-correcting mechanisms. Mispricing will eventually be smoothed out by arbitrage, although sometimes this process is slow enough to make investors lose patience and even stop returning your calls.

Emotion Markets, on the other hand, are a chase game about market sentiment. The pricing of goods does not depend on future earnings but on what the next buyer is willing to pay, which is based on their guesses about the psychological expectations of the next buyer. It’s like being in an infinite hall of mirrors: artworks, luxury watches, fine wines, NFTs, meme stocks, and (depending on your beliefs) Bitcoin all fall into this category.

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

When Cash Flow Becomes Narrative

Traditional finance has always prided itself on being rational analysis rather than emotion-driven, but over the past twenty years, this line has gradually blurred. In the public stock market, the meme stock phenomenon has turned stocks into collectibles; for example, GameStop's value lies somewhere between a baseball card and a Basquiat painting.

The public equity market is gradually giving way to the private equity market. Here, pricing power often lies with a passionate buyer rather than group pricing. A similar trend is seen in credit, where funds are shifting from public markets to private realms: more negotiation, less transparency, and increasing divergence in investment outcomes. This leads to reduced liquidity, but volatility also decreases, paradoxically resulting in higher final transaction prices.

Moreover, the private market has slowly evolved into a narrative space, where each round of financing is like another revision of the same story. As investors, we beautify this as "long-termism," but it actually leads to uniqueness and subjectivity. Participants in the private market will still make offers based on future cash flow analysis, but (with the proliferation of AI) soon everyone will have access to homogenized AI-generated models. The only difference lies in the story you told GPT before hitting enter. The beauty of private market investments is that their effects truly begin to manifest after the investment is made: unlike public market investors, private equity and venture capital firms can actively manage and participate in the process of making the story come true.

When Narrative Becomes Cash Flow

Meanwhile, some areas historically dominated by market hype (such as cryptocurrency) are evolving in a completely different direction.

Bitcoin was initially a purely market-driven digital collectible, not reliant on future earnings expectations. However, Ethereum, DeFi tokens, and RWA projects are gradually moving toward the other end: they are starting to generate cash flows, providing staking yields and collateral returns. Today, an increasing number of crypto assets have observable cash flows.

The composability of on-chain financial tools transforms ownership, trading, and settlement into software-native functions, making cash flow markets potentially more efficient than public stock markets, offering 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 value.

The rise of prediction markets is bringing another highly specialized market into the mainstream. When insights about future trends shift from handing cash to bookies to real-time operating digital markets, new possibilities emerge. "Betting" on election outcomes is a popularity contest before results are revealed, but when combined with "investing" in regulation-sensitive stocks, it can become a hedging tool to optimize the risk-return ratio of portfolio trades.

Three Levels of Markets

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

1. Underlying assets (the objects being owned)
2. Ownership certificates (tokens or financial instruments)
3. Trading mediums (the infrastructure and rules for conducting trades)

When assets transition between different categories, such as from private to public or from physical to digital, it is often because one of these levels has changed. Privatization of a company alters the trading level; tokenizing a painting through NFTs changes the ownership certificate level; running RWAs on-chain alters all three levels simultaneously. Changes in these levels often affect who is eligible to participate in the relevant market and can significantly impact valuations.

This layered structure helps explain why we are currently witnessing such rapid market structure experimentation. Technology enables us to deconstruct and reconstruct "markets" through software, sometimes resulting in higher liquidity and sometimes 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 pattern where traditional market forms and new market mechanisms intertwine.

Liquidity as a Double-Edged Sword

Liquidity has become a cultural value orientation in finance, even revered as a standard. However, it is not always better to have more; like a double-edged sword, excessive liquidity can harbor invisible undercurrents.

In emotion markets, high liquidity often means high volatility: prices are continuously re-evaluated but lack stable valuation anchors. In cash flow markets, liquidity can facilitate effective capital allocation and transparent risk transfer. We need to carefully distinguish the essential differences between the two.

We can establish this correlation: the more a market's value relies on modelable cash flows, the safer its liquidity increase; conversely, the more value relies on narratives and scarcity, moderate low liquidity can serve as a stabilizer. This low liquidity can prevent "pricing populism," which stops the least knowledgeable participants in the market from determining asset prices.

Convergence, but Not Conflict

The main theme of the twentieth century was standardization, transforming unique assets into tradable securities by assigning CUSIP codes (the unique identifier for U.S. securities) to make more things investable. The twenty-first century may shift toward re-individualization, constructing deeper, broader, and more diverse markets that can be synthesized and combined to achieve more precise and targeted investment exposures 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 point to a more continuous, transparent, and flexible market architecture, far surpassing any previous form.

The traditional binary classifications: public vs. private, interchangeable vs. unique, speculative vs. productive, are dissolving. We are facing a continuous spectrum ranging from purely emotional to purely cash flow-driven, with most assets distributed in between, trading along a liquidity spectrum from absolute liquidity to agreed-upon transactions.

Market Insights

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

Throughout history, we have largely separated the two: finance belongs to rationality, while art belongs to romance. But technology is forcing them to merge, revealing the spectrum between rationality and narrative, which is the fundamental backdrop of all value creation.

Our task as investors, entrepreneurs, and regulators is not to defend one logic while denying another, but to design systems that can accommodate both measurable and unknowable dimensions, ensuring that neither side tips the balance.

Because at the end of the day, every market is a competition for asset attractiveness. Some competitions, however, can ultimately be redeemed for cash.

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