The tech industry loves jargon. In the web2 era, social media companies could reach ‘escape velocity’ by achieving ‘network effects,’ becoming more valuable as more users joined, improving the experience for everyone. The term ‘network effect’ became ubiquitous and was used to describe everything from dating apps to online marketplaces to enterprise software companies.
I am reminded of this again with the growing popularity of the “flywheel effect.” The term is not new. It had been in use since at least the 1990s before being popularized by Jim Collins in his 2001 book
From Good to Great.
Still, the term now feels like it is
everywhere!
In Collins’ original telling, the flywheel was a metaphor for the many small and important steps an organization must take, which, compounded over time, can transform a business from good to
great. Collins asked us to imagine someone pushing a giant wheel. With the first push, the wheel budges only slightly, but after hundreds of pushes it begins to gain momentum, where every new push becomes both easier and causes the wheel to accelerate faster and faster. Nobody can say for sure
which push helped it to achieve that momentum, because it is the product of all the small pushes together. The lesson for business leaders is: do the small stuff right consistently and you’ll be rewarded in the long run.
In Silicon Valley, it has been in use for a while. In a 2019 interview, Marc Andreesen described how Netscape was trying to put the flywheel in motion: more internet users would mean more internet publishers, thus bringing on more users, increasing the total value of the platform.
Today, through repeated use, the term has evolved into something else. Rather than describing the impact of sound operational decision making, flywheel effects now describe how
positive feedback loops impact
systems, like marketplaces and whole industries.
Here are some of the ways the flywheel effect can describe what’s going on today:
Digital asset treasury corporations like Strategy have created a flywheel effect, where the issuance of new shares funds the purchase of more Bitcoin. This grows Bitcoin per share, drives the price of Bitcoin higher, and induces more people to buy shares of Strategy.
This positive feedback loop extends to spot and ETF markets. On May 27, SharpLink Gaming became the first major public company to announce an ETH treasury strategy. At that point, ETH ETFs
had gathered only $117 million in net assets YTD. But since then, ETH ETFs have seen net inflows of
$5.9 billion. Digital Asset treasury companies didn’t take away from ETFs. They grew the whole pie.
Stablecoin issuers produce flywheel effects too. For example, Tether uses excess reserves to buy Bitcoin, which pushes the price higher, increasing interest in Bitcoin and thus the demand for stablecoins like USDT to buy them.
Another flywheel: In past editions we’ve talked about how IPO season is coming to crypto, following the explosive launch of Circle and in the wake of changing rules and regulations. A successful launch of one company induces others to file to go public. This grows the total investible universe of companies, broadening its appeal and accelerating its inclusion in traditional portfolios.
Some of these examples of the flywheel in motion border on another concept which we have talked about in the past -reflexivity. The term, popularized by George Soros, describes how actions taken by market participants can shape market realities, creating self reinforcing or self-defeating feedback loops.
A flywheel is, by its nature, something that creates a positive feedback loop. What happens when things reverse?
Let’s start with digital asset treasury companies. Some of these firms have taken on leverage. If they no longer command a premium to NAV, and if the underlying asset declines, then they may not be able to tap the markets to raise more money and may even need to sell to meet their liabilities. That will put downward pressure on Bitcoin and other assets.
Right now, IPOs are acting as a tailwind. But even if the next slate of issuers is likely to be very high quality, if the cycle lasts long enough inferior businesses will try to tap the markets. If they fail to meet expectations, investors may write off the whole sector for a time, as they did during the Dot Com crash. That will have a chilling effect on everything.
ETH treasury companies are buying ETH and pushing the price higher, but the rising price of ETH is causing many ETH holders to queue up to sell their assets. As it takes a week to unlock staked ETH, we
can see there’s now $2 billion waiting to be sold. The higher the price goes, the more that may come free trading. That’s putting a brake on the flywheel.
In the end, the good times can’t last forever. Markets are cyclical and this one will come to an end. But right now the (fly) wheels are in motion, and it will take a lot to stop this train.
July 24, 2025
