Unpacking the Flywheel Effect: How Crypto Markets Are Driving Momentum

The article discusses the "flywheel effect" in crypto markets, where positive feedback loops drive momentum and growth. It highlights how demand for crypto assets drives up the price of underlying assets, such as bitcoin, and induces more investors to buy shares in digital asset treasury companies. The article also mentions the impact of ETFs and stablecoin issuers on the market. The author concludes that the flywheel effect is a reason to be bullish on crypto markets.

The crypto market has been experiencing a significant rally, driven by a phenomenon known as the "flywheel effect." This positive feedback loop is creating momentum and growth, making it an exciting time for investors and financial professionals.

The flywheel effect, popularized by Jim Collins in his 2001 book "From Good to Great," describes how consistent, small actions can lead to exponential growth over time. In the context of crypto markets, this effect is evident in various ways. For instance, the demand from investors for access to crypto assets drives up the price of underlying assets like bitcoin. This increase in price induces more investors to buy shares in digital asset treasury companies (DATs) like MicroStrategy, which in turn drives the underlying asset higher, creating a positive feedback loop [1].

Another example of the flywheel effect can be seen in the ETF market. The launch of ether-focused digital asset treasury companies has accelerated flows into ETFs. Ether ETFs have seen inflows of over $6 billion since launching, with ETH gaining as much as 50% in July and closing the month at around $3,800 [1].

Stablecoin issuers also contribute to the flywheel effect. For example, Tether, the issuer of the USDT coin, reinvests its profits into bitcoin, pushing the price higher and increasing aggregate interest in bitcoin. This, in turn, creates demand for stablecoins like USDT to buy them, further fueling the flywheel [1].

The impact of the flywheel effect extends to the IPO market as well. The successful IPO of Circle (CRCL) has been followed by several companies filing to go public, such as Grayscale, BitGo, Bullish, and Gemini. A wave of successful IPOs grows the total investable universe of companies, broadening its appeal and accelerating its inclusion in traditional portfolios and indexes [1].

However, the flywheel effect is not without risks. If the market cycle lasts too long, it could lead to a situation where businesses try to tap the markets and fail to meet expectations, potentially chilling investor sentiment and causing a market downturn. Additionally, as the price of ETH rises, holders may sell their staked ETH, putting the brake on the flywheel [1].

Despite these risks, the flywheel effect is a reason to be bullish on crypto markets. The momentum is driven by consistent, positive actions across the market, and it will take a lot to stop its momentum. As the market continues to evolve, investors and financial professionals should stay informed about the latest developments and be prepared to adapt their strategies accordingly.

References:
[1] https://www.coindesk.com/coindesk-indices/2025/08/06/crypto-for-advisors-the-hidden-mechanics-behind-this-crypto-rally