Guest Post by Tiana Laurence Investor, Founder & Author of Blockchain For Dummies
The blockchain and crypto space saw a tremendous infusion of capital starting in 2017 — some $22.5 billion USD — yet that has slowed significantly in the last quarters of 2018. Typically, an infusion of capital is great for an industry, but what happens when those funds lose 90% of their value? The price of Ethereum has seen massive swings from $1300 to $170 in 2018, and this has hamstrung many projects that did not diversify their funds. These projects are now in a vulnerable position and projects fail to launch.
So where did the money go? Why do we see so much volatility when the technical specs backed up the “year of the blockchain” hype? Was it the excessive boat parties and Lambos, the get-rich-quick scams, taxes, payroll, investor bots, over-influx of mined crypto? Or lack of token economics? Brian Deery, the Chief Scientist at Factom, said it well, “The whole ICO craze was irrational exuberance. I do believe these crypto tokens will be key to the future, but the industry got ahead of itself.”
Not a Closed Loop
One key issue is the onboarding of capital into the crypto space. Investors need to believe that their dollars are worth less than Bitcoin/Ether (or the trendy crypto of the moment). They trade their dollars for bitcoin and then their bitcoin for that token, and this pulls the value out of the network.
Project teams face similar real-world intrusions: rent, payroll, taxes, and other large recurring costs cannot currently be paid in crypto. Crypto creates additional accounting burden for these organizations and investors. The thin cryptocurrency markets rise and fall easy.
Protecting Against Volatility
Smart money managers and experienced crypto entrepreneurs understand that while markets are naturally volatile, the cost of running a business only increases with growth. Thus, fundraisers protecting their runway are left with several paths: hedging at known volatile investments, dumping, or diversifying into other cryptos.
Consider this example investment cycle: An investor (sometimes known as “future system users” for those utility tokens) takes their real-world currency and buys Ether or Bitcoin, which is then flipped for token X. The issuer of token X collects the Ether or Bitcoin, and then trades it for real-world currency. As Bitcoin and Ether are relatively thin markets, these demands drive their price up. But when investors are satisfied and token creators hedge for the future, the price drops. Despite the volume of capital flowing, it has entered and exited the system quickly.
As prominent blockchain investor Matt Roszak recently put it, there is a growing list of “Zombie tokens. They were successful at raising, but development is incredible is difficult. But, some of the best team, understand crypto winter is the best time to build.” — and savvy investors see this as an opportunity.
More Than Nerds and Idealists
Part of the industry’s fast growth stems from its movement into the mainstream, thus attracting more sophisticated investors and traders. Unlike more regulated markets such as NASDAQ, crypto markets do not have the same oversight or policing while being global and operating 24/7. Most allow investors from anywhere without caps or limits. A sophisticated investor with capital can savage a micro-cap token and create havoc on larger (yet relatively small) markets like Bitcoin and Ether. These new investors have introduced more complex trading algorithms, bots, pump-and-dump schemes, insider trading, front-running, and value inflation. Small investors don’t have a chance.
Despite this monetized volatility, the blockchain community remains an incredibly resilient group of innovators. They are quick to adopt more complex methods of protection and value retention: auto adjusting the difficulty rate on blocks, protecting against predatory mining pools, even hard-forking the whole network when a significant amount of the value and integrity of the network are compromised. There is also a push towards distributed trading to protect users funds from centralized system hacks and bots.
The Year Ahead
Given this volatility, what will 2019 bring to the blockchain community? As Deery put it, “Most ICO projects are in a nascent stage. Software is tedious and expensive to build.” ICOs will need to address how they respond to regulatory oversight, taxation, and new legal jurisdiction, such as Malta. 2019 will also see a new wave of innovation fighting for attention. Alyse Killeen with StillMark, a blockchain investment/consulting firm, sees four core areas growing in 2019. “We are looking at four categories: Second layer infrastructure, application leveraging the second layer infrastructure, enterprise tools that help institutions adapt blockchain, and companies that will be affected by blockchain.”
Other factors include stable coins and government-issued cryptocurrencies, which may enable the onboarding of larger institutions and the potential tokenization of unlimited connected platforms. As Roszak says, “We will see a lot of pivoting and shifting, we may even see venture funds spring up out of the ICOs to sprinkle their vision through deploying capital vs. building.”
Mainstream investments and developmental pivoting show that while 2018 may have been the blockchain’s big splash, 2019 is the year innovation becomes grounded in reality. However, this is the way technology tracks — the Dot.com era unfurled the same way. Now that the irrational exuberance and billion-dollar raises have passed, the real work starts as dreams inch towards reality.