Colin Platt here once more, time for another blog, exploring some of the topics that Zeth, Shaun and I found interesting and noteworthy. Last week we shared part one of our two-part interview with Paul Gordon, where he talked about where the industry has been and the trends that he’s witnessed in the crypto space. Today he talks to us about what’s next.
CP: Let’s shift our focus on where we are today. We’ve seen the run up in crypto prices in late 2017, and subsequent slide down pretty much ever since. What are some common challenges you see people in this space discussing?
PG: With my old trader’s hat on, I’ve written some analyses looking at the various price-cycles bitcoin has followed since its beginnings, identifying many of the similarities between the well documented price bubbles that it’s mapped out on a number of occasions now.
Having been around since the time when the first businesses in the space were forming, I have also seen the same challenges being faced, albeit at smaller scales, during each of these previous cycles.
The main challenge I see, in general, is that the majority of businesses establishing themselves within the industry (up until now), have been basing their business models purely on crypto which also means they are completely exposed to the sentiment of the crypto markets. It’s like experiencing normal business cycles on steroids and very difficult to plan for.
For those in the exchange or broking space, the major challenge is how to manage scaling up and down during these extreme periods of growth followed by extreme contractions. Unfortunately there has been a lot of scaling back and enforced redundancies over the past year since the ICO bubble popped when; investment capital wasn’t hedged; teams were scaled up too fast; traction wasn’t achieved and; money ran out.
You never want to see individuals and fellow founders go through tough times. I understand the risks that entrepreneurs take only too well but hopefully lessons have been learned and won’t be repeated next time.
As I mentioned earlier, I was never a fan of the whole ICO model, concerned that its inevitable fallout would be detrimental to the industry as a whole. At least it came and went relatively quickly though.
Many solid projects that were a little more sensible have managed to survive and will hopefully thrive in the long run will and we’ll hopefully see the next wave of innovation being built upon far more solid and realistic foundations.
I think we’re already seeing the early signs of new teams forming and raising under traditional investment terms, gaining the kind of support that is critical to any early-stage project.
If those founders and investors do also want to benefit from any future uplift in the crypto markets, my suggestion (and this is not investment advice, of course) would be to invest in the native tokens of the network protocol they have decided to build upon or upon which their own solution can operate.
Right from the earliest days when businesses started forming in the ecosystem, I always thought that investing in Bitcoin projects created a bit of a conundrum to be honest.
Typical startup failure rates (i.e. 90% will fail) were naturally still going to apply so there would obviously be an equally large number of failures in this space too. At the same time it was just as likely that bitcoin would still grow and thrive on the back of all the remaining 10%’s successes, a little bit like the perfect ETF tracker really.
If you were able to go back and buy a basket of all of the crypto companies seeded between 2012 and 2014, your total investment would, without a doubt, have under-performed bitcoin itself.
There are very few out-performers out there.
CP: One of the really big things we saw during the last bull run was a proliferation of new cryptocurrencies, and tokens. It seems like focus has consolidated around crypto like Bitcoin, Ethereum and maybe a handful of others. Do you think that this is a lasting trend or will we see a raft of new assets if the markets pick back up?
PG: I really was very sceptical of the whole thing from the very beginning to be honest. I really never could, and still don’t understand why every application would require its own token.
We’d seen earlier attempts of the idea back in 2014 when, as I said earlier, Counterparty and Mastercoin were released. Many tokens were issued but I’m pretty sure none still survive today – with the combined market cap of Counterparty and Mastercoin’s (now called Omni) themselves being under $10m.
I’ll caveat that by making a clear distinction between the native “network tokens” that do potentially provide the necessary economic incentives to maintain the security of their underlying networks (as per BTC or ETH, for example) and the so-called “utility tokens” that fuelled much of the 2017 ICO frenzy.
A few years before the idea took hold, one of the narratives amongst the Bitcoin die-hards was that bitcoin would one day reduce the friction we have today when dealing with so many national currencies.
Why have so many when we can have one?
Fast forward to 2017, and suddenly the narrative changes to one where the world, instead, should have a dedicated token for each end every web app!
I don’t care what anyone says, and as ex-markets guy, in a world where every app has its own token, the friction (and therefore cost) of exchange between them would become restrictively high and the user experience unnecessarily bad.
Just because you can doesn’t mean you should.
If you think about it, especially through a lens whereby “decentralisation will level the playing field for all”, we’d actually run the risk of strengthening new monopolies rather than weakening old ones.
Any underlying “token” behind the most successful decentralised apps would necessarily become the most liquid ones in the market too. Being the most liquid, they would also command the tightest bid/ask spreads and therefore be the cheapest to enter and exit.
Conversely, any subsequent competitor that came along to challenge them, whilst potentially being a better solution, would struggle to attract the same depth of liquidity for their token and so the cost would remain prohibitively high for users to access their platform when compared to the market leader.
The decentralised Amazon of the future would, no doubt, become as just as entrenched in the market as the original version is today.
Which takes us back, yet again, to “Just because you can doesn’t mean you should.”
I personally spoke to a number of projects during 2017 that were writing their whitepapers who’d say “the only thing we now need to do is work out our (so-called) tokenomics!”.
Given that the majority of these projects were planning to build on top of Ethereum, I never once heard anyone say that it might actually make sense for their applications to use Ethereum’s native token, ETH, to incentives their users instead (if financial incentives and market risk is really what their average user wants or needs in the first place) so that all of these dApps within the broader ecosystem would potentially become, you know, interoperable. Avoiding an inordinate amount of cost and inconvenience for their future users, let alone headaches for themselves with having to get tokens listed on exchanges whilst competing with thousands of others for awareness and liquidity.
You only need to look at the daily-user stats for many of these apps which once carried these ridiculous valuations to emphasise the point.
In many cases, I really don’t think there was any dishonest intent – simply a fascinating social experiment showing how easily people can get swept up in memes at a very large scale.
CP: Do you think that there will there be a place for such things in the future?
PG: Of course, there may well be. The history of new technologies is littered with examples of “right idea, too soon”. I’m just pretty convinced that any successful future versions won’t each have their own unique token.
On the flip side, we did see a much smaller number of new networks/protocols raise funding for development and subsequent (or pending) launch which may well prove themselves in the market if/when they attract a broader network of active developers and actual, viable use-cases.
In the end, I think we’ll end up with no more than 4 or 5 networks that each do something particularly well. If so, the liquidity of their native tokens will be deep enough to ensure that the friction/cost of trading between them will remain attractively low.
CP: Last question, imagine that you had a time machine, and could tell yourself one thing as you entered the space back in 2011 (other than buy more Bitcoin), what would it be?
PG: Ignore Colin’s last question when he asks me for an interview in April 2019 and just jump in my time machine to go back and buy more bitcoins.
CP: Fair enough, thank you again for coming on, and thus proving that time travel does not exist.
PG: Big shame! Thank you again for having me.
If you missed part 1 of the interview about crypto and blockchain technology you can find it here.
Nothing here should be construed as financial advice, recommendation or endorsement of any project or cryptocurrency.