Oh, How Far We’ve Come!
Man oh man, this week has been the most exciting week since January 2018. As crypto-winter seems to ‘thaw’, we start to see new (and old) crypto folks re-emerge like fresh tulips (pardon the pun) sprouting through old mulch around a tree. We’re 3+ months into 2019 and we’ve started to see some classic (and new) narratives emerging. Staking seems to be the hot topic these days, with projects like Tezos taking mindshare among the most talented crypto-enthusiasts, funds and third parties in the space. Other narratives remain and grow, like institutional money flooding into the space (when moon?) and STOs (security token offerings) taking off as the next big tokenized investment wrapper of sorts (are we still so sure about this guys?).
The resources available to investors and traders is more impressive than it has ever been, with companies like Messari and Delphi Digital providing freemium models for crypto data and research. We certainly seem to be heading in the right direction, and I think everyone would agree that this bear market has been the most productive we have ever had (keep buidling!).
So, where does that leave us today? What context is important as we stretch forward into the unknown yet again, pushing our crypto-philosophical ideals and shilling our favorite protocols (re: underwater investments) to our parents, friends and colleagues? If you’re just getting into cryptocurrency hopefully this article helps provide some context on where we’ve been. If you’ve been here for some time, hopefully this is thought provoking and a reminder that speculation is king in crypto.
Here are a few examples of what we are seeing in the industry today…
Your Favorite ICO Is Probably Dead
Remember when you put $1,000 into the decentralized version of eBay? Well, it may still be openly traded on a secondary market or decentralized exchange, but that doesn’t mean the project is ‘alive’. If the team is unresponsive, their social media is dominated by a few admins or “community managers” and no new features have been pushed or announced in some time, the project is probably dead. Dead, meaning don’t expect there to be any tangible value being delivered by the team moving forward, and understand that because of that, any large price increase or decrease is probably just traders pumping / dumping the token for their own gain (likely at your expense if you participate). ICOs are startups at the end of the day, and the “95% will fail” rule applies to them as well. Write it off on your taxes, learn from your mistakes, do your own research this time and move on, because innovation does not stop and crypto moves incredibly fast.
Your Favorite Project Team is Adapting, But They’re Probably Not Excelling
One pattern we’ve seen over and over again is that many projects have successfully raised money, but have not successfully executed on their goals or vision for the project over the last 12-24 months. They may have raised $25,000,000, built out their team, delivered the tech, onboarded key ‘partners’ and retained the best law firm, but they haven’t been able to build a user base or execute on goals because perhaps:
A true need for their token never existed
They’ve been made obsolete by another project
General innovation in the space has overwhelmed this project’s dated tech
Bigger needs have emerged, making this project’s solution unimportant
Put yourselves in the shoes of this project’s CEO - what do you do? You adapt, and quickly, because you may still have a few million in the bank and want to do the best for your investors (hopefully).
The need for ‘X’ token in its specific industry, or within crypto, is no longer strong (or the need never existed), so the goals from the team and structure of the project change dramatically. In this fictitious scenario, let’s say the project token was designed to be used to earn rewards when making purchases on various e-commerce websites, but the team was unable to execute and is now focusing on utilizing their token for cross-border payments instead.
The Good: While the team has laid off some employees and has significantly less resources, the project is not ‘dead’. If the team can execute on this new roadmap and plan, who knows, you might end up recouping some portion of your investment as a token holder.
The Bad: Just because the team has a new plan, doesn’t mean the token functions as a legitimate component of this new plan. Legitimate token price accrual (re: price goes up because it should and is designed properly to do so, not because its price is tied to the price of Bitcoin for ‘x’ reasons) is tough for the team to originally design and tough to understand as an investor. If the token isn’t used in any unique way within the project, or isn’t used significantly within this new plan, it makes it tough for the token to accrue value for legitimate, measurable reasons.
Tokenomics is a wild world within crypto that is ever-changing and something the best and brightest work with on a daily basis. Check out this older article from William Mougayar for a quick, rough summary of tokenomics with categories on how token function / utility could be defined.
The Ugly: The project didn’t execute once, what makes you think they’ll execute this time with a quickly formed plan that may or may not properly utilize their token. Oh and by the way they have significantly less funding than last time. Taking an emotionless approach is the best thing you can do in evaluating the new ugly truth that the startup you invested in was not successful and probably never will be.
An updated roadmap are not necessarily bad though, as many projects are simply building off the success they’ve had already with an updated roadmap that includes goals that are relevant to the original project’s goals and concept. We’re seeing a lot of ‘middle-ground’ examples where the token has some utility, the project team has somewhat executed, and the new plan may deliver some tangible value to the project, but success is still a moon-shot and its not immediately clear why this new ‘plan’ (“We’re moving to offer staking!” or “We’re creating a DAO!”) will work or is needed in any way.
Your Favorite Project’s Token Price is Down, But the Team is Executing(!)
Perhaps you’re one of the few retail-venture-gamblers out there who was lucky enough to pick a project between 2016 and 2018 that is actually executing on their goals and plan. The token price on secondary exchanges is most likely still down from it’s all-time-high, but the future looks bright as the project team has delivered on its promises. Unless you invested in the Binance ICO or a small handful of other projects, you most likely don’t fall into this category.
Just as you did at the beginning, it’s important now to re-evaluate the potential for this project to continue to execute on its goals. Competition has become more intense and innovation continues to plow through yesterday’s successful projects, birthing tomorrow’s unicorns. The tough part is often that token price is a terrible indicator of project success, and vice versa, because speculation on price growth is all we have known to date - something I’ll touch on later. Evaluate a project on the success of their original goals not on token price growth - they’re not the same thing.
Your New Favorite Project is Launching, and is the Next Big Thing!
And the cycle continues… while many project’s die, some projects adapt, and a select few continue to excel, a new wave of entrepreneurs join the fray with moon-shot goals or dreams of some network-effect around their new token-focused blockchain startup. There are a few primary differences in 2019 that are important to follow:
The SEC is Clamping Down
As of just yesterday, the SEC has come out with a formal statement on what your favorite project’s token should do if they’re interacting with US investors / users in anyway. The SEC has gone after the proverbial low-hanging fruit, but we may see them attack larger projects who have also played out of bounds. We need more time to understand how this affects U.S. based investors or projects who have / will interact with the U.S.
Competition is Stronger
If your favorite project is launching another exchange, wallet, price-tracker, stablecoin or “Canada’s first ______” its most likely up against competition who survived the bear market and is now setup with a more mature project that is better positioned to capture users. Few projects will be the first anymore, even if the first was not originally successful.
It’s Harder For Projects to Raise Money
Tons of blockchain startups raised money from the smartest investors by selling them tokens with the understanding that the token would increase in price if the team executed, allowing the investor to quickly cash-in on their early stage investment by selling their tokens on a secondary exchange. This happened at the private level with prominent venture capital firms and at the public level with you, the retail investor. Not-no-mo’ my friend. Equity is king now as blockchain-startups are treated like a traditional startup and put under a proper level of scrutiny by private investors. You should do the same.
The Investment Structure You Use Has Changed
ICOs were a retail investor’s dream, as they were now able to invest in a startup at an early stage just like a venture capital firm or angel investor would. Obviously these investors are purchasing a token vs. real equity in the company, but many saw tremendous gains by picking the right ICOs and timing the market correctly. This bubble popped, along with Bitcoin’s price growth, and most ‘genius investors’ were stuck holding illiquid tokens that... well, are DEAD.
Fast forward to today, IEOs (Initial Exchange Offerings) are growing in popularity, seemingly showcasing a bet that can never lose if you’re able to get in early, and the cycle will repeat itself. Investors will pile into IEOs until there are more IEOs than there are investors looking to invest in IEOs. IEOs bring with them additional benefit over the ICO structure (ex: relatively immediate liquidity on the exchange running the IEO), but fundamentally are no different than ICOs. At some point, this bubble will pop and investors will be stuck holding tokens for projects that will certainly be more liquid, but… well, are DEAD.
Early-stage investment is hard, and not for the weak of heart. There’s a reason only a select few manage millions of dollars, but the cycle within crypto will continue with new and old investors pouring money into tokenized startups. For now the most successful raises will seemingly be run through IEOs and the timing of the cycle will expose itself after the fact, with a similar amount of winners and losers.
What’s Next for Crypto?
Hint: No one knows.
The next bubble, be it IEOs, Bitcoin, or through institutions or HNWI rushing into the space carelessly in some way, everyone will say they knew ‘it’ was going to happen. Some will get burned, while others get rich… and the cycle continues.
Hell, maybe there ISN’T another bubble and we see steady, consistent growth over the next 10 years. I wouldn’t bet on it, but hey, no one knows.
The constant across every market cycle, once you’re able to spot it (it took me a few years to see, understand and experience these market cycles), is speculation. If every emerging ideal, business or philosophy could be tokenized and traded on a secondary exchange, most would be traded by speculators or invested in by deep believers. Speculation will always exist as long as there is a tangible reward for successful speculation. Crypto is unique in that each of these startups, existing projects, dead projects, decentralized organizations, stablecoins, exchanges, etc. has been tokenized and is generally traded on a secondary market. Demand will continue to rise and fall, new narratives will continue to show themselves, and winners and losers will emerge. Understanding what speculation is, how it is present in crypto, why and how it affects your favorite blockchain project is key.
Speculation occurs at every level. It allows early-stage startups, ideals and communities to get off the ground and grow, whether they utilize blockchain technology or not. Speculation is present in traditional financial markets in some of the same ways its present in cryptocurrency markets. Speculation does not necessarily denote a bubble. The bubble has been denoted by the bullish market cycle that crypto has presented over time, that showcases growing popularity and introduction to cryptocurrency, which is then typically followed by about 16 months worth of a bearish market i.e. the metaphorical bubble popping.
While no one knows what is next for crypto, there is one certainty: that price speculation will consider to drive introduction (and hopefully adoption) of these new projects and this new technology.
Has crypto spring sprung? Hint: no one knows. :)