If 2018 was the year blockchain came out of beta, it is also proving to be the year of the great crypto correction and the culling of unstable coins and sham fund raising methods. Like when the dot com bubble burst in mid-1990, this market correction will also leave many who speculated at the peak of the hype cycle largely disappointed and a little poorer as they traded their hard earned fiat money, which so many crypto-utopians dismissed, for a stable of cryptocurrencies that have since proven to be wildly volatile and backed by little or nothing like so much vaporware.
Despite this rapid market deflation of broad crypto assets and the unviability of many blockchain projects, including some well-funded and well-backed efforts, cold hard fiat cash is proving to be king even in the digital age. Like the dot com era before it, from this crater littered with the detritus of so many false promises will emerge the phoenixes of the blockchain era. Precursor firms like Myspace was to Facebook, notwithstanding the backlash against social networks, will also bear out with blockchain applications and the use of cryptographic methods as digital and fractional representations of underlying assets, identities and title. The comparative computational and organizational complexity (and the requisite suspension of disbelief of the low-friction, high-trust age) required to understand blockchain in the first place, is paid off by an exponential reduction in social friction. Crypto’s wunderkind, Vitalik Buterin, made this very observation in a series of Twitter posts admonishing his followers to go long on this aspect of the technology. Like cyber risk evolves according to Moore’s law, the challenges that have plagued many blockchain aspirants are similarly resolved. Fast followers and those that go long on this technology will be rewarded for their patience.
While the market correction or crypto crash has eradicated billions in value in what can be called a handover from retail to sophisticated institutional investors, thousands of lesser known coins have been all but eliminated and removed from circulation. From utility tokens, many of which served no purpose at all, to the coterie of so-called stable coins, which have proven to be very unstable indeed and backed by little more than slick websites and star promoters, like DJ Khaled and Floyd Mayweather Jr., who reached a settlement with the SEC. What remains in this great void is a very important market correction, a veritable cull, where blockchain and the future of cryptocurrencies have been handed back to the adults in the sector. The innovation like the zeal that gave rise to the internet age minting a billionaire tech titans, will not stop. Rather, it will continue, but this time by more disciplined teams, technologists and investors, all of whom have been chastened by the lack of discipline and investment diligence that burned them over the last few years.
The internet only changed the world when people stopped talking about it and all the fancy software and hardware sub-components that make the magic happen faded to the background. Blockchain and cryptocurrencies are undergoing a similar brand and communication correction. What people ultimately want of technology are outcomes and the outcomes that blockchain can provide are vitally important in an unstable world where the erosion of institutional trust is as powerful a global force as gravity. Many of the economic and expense models of the traditional economy are out of whack with a changing world and rapidly shifting or unaddressed consumer needs. Gravity pulled down the apex of peak crypto and deflated greed-filled bubbles. However, it would be wrong and strategically unsound to dismiss the technology and asset class outright. Indeed, over the last 10 years since bitcoin was first introduced, even after the precipitous price drop in 2018 where the new floor of $3,000 is 200% up from this time last year, it remains one of the best performing investments over this time horizon. This proves that not all cryptocurrencies are created equal, especially when it comes to financial regulators.
To the sophisticated investor who not only understood the technology but followed the mantra of the dead man’s portfolio – i.e. hold the asset and do not flinch with volatility – bitcoin has proven to be an exceptional source of returns, although not at all uncorrelated from instability in the real world. Herein lies the greatest indictment of the crypto market, which was largely propped up on the promise of democratization and decentralization of value creation and capture, neither of which is proving true as the entry to this asset class is barred by three high walls. The first being a technological barrier, the second being access to capital and the third the ability to understand and withstand the unique risks posed by this largely uninsured and uninsurable segment by today’s standards. If you want to combat the spread of communicable diseases by helping people wash their hands, you must also address access to clean water. Broadening the base of the crypto pyramid requires similar ecosystem development calling for greater education, access, technological literacy and numeracy.
Nevertheless, the future of blockchain, cryptocurrencies and the digitization of assets seems bright. Economists, such Christine Lagarde who heads the IMF, is suggesting that central banks go long on cryptographic methods to create a digital twin of fiat currencies. Leveraging the power of blockchain to eliminate double spend, manage units of value in circulation and eliminate transactional friction to near zero can serve as a powerful economic and trust accelerant in a world where billions of people are on the sidelines and institutional trust is also proving to be vaporware. This call to action is no longer hypothetical in the world’s most idyllic blockchain sandbox, the Caribbean, where island after island is increasingly relying on (brace yourselves) centrally-backed digital currencies. Along these lines, Barbados, home to the business statesman, Gabriel Abed, has introduced an economy-wide cryptocurrency that is not only thrift in a narrow network of pre-selected participants, it is legal tender for broad goods and services on the island. For a technology and a payment method born in the shadows of cybercrime and all too often used to extract rents from ransomware victims, the future of cryptocurrencies and blockchain projects lies not on the margins of the global economy, but in the light of center stage. The crypto correction of 2018 will allow the real world-changing applications to take the stage.