How wilting investor enthusiasm will revive innovation in the cryptocurrency ecosystem

How wilting investor enthusiasm will revive innovation in the cryptocurrency ecosystem

The crypto bear market can be depressing. It feels that all the excitement and hope is gone. In our view, however, the converse is true. In this article we will first examine the current bear market and argue why it creates an ideal environment for progress and innovation.

 

Doom and gloom

The total market capitalization of all cryptocurrencies has dropped this year from a peak of more than $800 billion on January 7 to less than $200 billion as recently as August 14. Google Trends maps a corresponding diminishment of interest. Even big ticket news items, such as Intercontinental Exchange announcing the forthcoming launch of Bakkt, a digital asset platform backed by Starbucks and Microsoft, barely moved prices. And, of course, the inevitable Bitcoin obituaries have begun to emerge en masse.

Those who invested close to the peak bemoan dramatic losses and lessons (we hope) learned. We hear stories of those who, following the unwise hype of the crowd, took on debt only to incur huge losses almost straight away. Blinded by greed or envious panic, these investors failed to follow this simple heuristic of high-risk investing: do not invest what you can’t afford to lose. While folly created them, the consequences are too harsh to make light of. It is only a shame that these tragedies are unlikely to deter the next round of lemmings ready to topple over the peak of some other future bubble chart.

 

Fear, Hope, And Human Nature

Meanwhile, many investors continue to hold on, either due to blind hope, genuine belief in the promise of the technology, or because they have seen the logarithmic patterns behind bitcoin’s previous growth: This has all happened before, and it will all happen again. At the time of writing, total market capitalization is still almost $50 billion higher than this time last year, and daily trading volume is close to triple, according to CoinMarketCap.com.

Telegram groups and Reddit threads are overrun with a mix of optimistic predictions and doom-laden hand-wringing regarding what is next for the market. Investors scrutinize each new review of exchange-traded fund proposals, debate what factors will finally bring institutional money in, and wonder at possible price manipulations as Bitmain prepares for an IPO. All of these factors are fair to examine, and I like to think that these theorizers are motivated by their belief in the technology rather than merely clinging on to delusion-born shattered dreams. But the truth is: if you believe in the technology, then the market can wait.

 

A Change of Tone

There was a brief period at the end of last year and the beginning of this year where it seemed you could barely move without hearing someone wax lyrical on the promise of blockchain. Yet most had come to the technology only because of the market hype and short-term financial opportunity: When the market crashed, the talk vanished. Bring up crypto with a stranger and no longer will you confront a dynamic spray of jubilant pontificating. Rather, you might just meet a cold gaze amid a cloud of anxious silence or else gleeful (and premature) schadenfreude.

With one exception: While memes abound mocking speculators who claim they are only “here for the technology,” bear markets have a tendency to clear away those who aren’t. If you talk to serious techies and their business counterparts – those who have endured through all the ups and downs – their passion for the blockchain’s world-changing potential hasn’t changed at all. While price fluctuations may have done some financial damage, the environment has become more hospitable to trust, hard work, and genuine innovation.

 

So What’s The Good News?

Firstly, we will see far fewer (for now) of what I call “Why blockchain?” projects. These include the likes of Dentacoin, the “blockchain platform for the global dentist industry”, which at its peak had a market capitalization of over $2 billion, and Potcoin, which “provides banking for the cannabis industry”. Such initiatives, in the opinion of this author, have been unable to provide a rational for their use of blockchain technology – beyond, of course, the financial opportunity presented by recent frenzied speculation.

I will not go as far as to assert that these projects are pure scams. I will say that the incentive behind the creation of far too many tokens has been a result more of opportunism than credible use cases. As the market gets less frothy, a higher proportion of projects will emerge from practical rationales, and this can only be a good thing for innovation. Incidentally, and perhaps worryingly, for those concerned with the direction of the market: Dentacoin still has a market capitalization of more than $100 billion.

As one testament to the market’s change in dynamic, we can look at the planned sale – via an ICO – of New York’s Plaza Hotel. First announced in March, the idea to sell a large portion of the hotel on the blockchain lacked a clear rationale beyond “blockchain” and “cryptocurrency” being hot words for attracting investors. As of August, it is already reported to be failing. Does this mean that there is no use case for blockchain in the hospitality industry? No, the point is that the changing market will force entrepreneurs to be more careful about their use of blockchain technology: only using it when it is, well… useful.

 

Blockchain is Trustless; Speculators Can’t Be Trusted

Last year’s bull run brought an army of what you might call cottage-industry bottom feeders to the cryptocurrency landscape. Having a blockchain reference in my job title on LinkedIn led to a surge of unsolicited messages, which at one point peaked at dozens daily. They were pitching ICOs, or else pitching to help me with my ICO, or to join a pool, or to build out my “tokenomics”, or to moderate my Telegram channel, and so on. They may have saved themselves some time if they had looked at my profile long enough to learn that I was not running an ICO, nor did I have a Telegram channel. No points for attention to detail. But as the old saying goes, when there’s a gold rush, the ones who make the money are those selling the picks and shovels.

Much in the same way that not all ICOs exist to exploit a frothy market, not all pick-and-shovel salespeople are bad actors. But many are. And many, I have come to understand, do not have strong services to offer, but are damned sure happy to charge exorbitant prices. This breeds an environment in which it is extremely difficult to build trust with others in the value chain. As a weaker public market trudges along, the purely exploitative get bored, and tighter budgets mean only those who can deliver genuine value will stick around. Those who do – and the people they help – will likely, in the long run, be rewarded.

 

What About The Money?

So a bear market doesn’t only shake out weak hands. It also clears the landscape of many of the all-too-common “Why blockchain?” projects. Moreover, bad actors will soon get bored and move onto the next quick-buck opportunity. The landscape is getting clearer for genuine innovators to work hard at developing their tech, building great teams, and driving real adoption. But doesn’t this also mean that entrepreneurs with genuine visions are now going to have a harder time raising sufficient capital? After all, we are now seeing many companies delay their ICOs.

Perhaps there is some truth in this. But it is also true that pre-ICO investment, particularly from venture capitalists, has been going through the roof this year. Good projects, with great teams and real use cases, will raise money just fine.

 

But What About The Tech?

Finally, with so many investors burned, won’t this set back mainstream adoption of cryptocurrencies? Well, as we have seen via the never-ending cycle of Bitcoin obituaries, the mainstream tends to have a short memory with these matters. There are always new folks who will be ready to get burned, and if a technology is useful, people will use it. Just as I am certain that the current, ongoing market bust does not preclude the possibility of yet another bubble, I am confident that the right mix of technological innovation and marketing savvy will be sufficient to drive widespread adoption. If the world needs it, that is. And that is the trillion dollar question.

What do you think: Was the bubble market bad for innovation? Will a long-term bear be worse? If/when another major bull run arises, how can we mitigate against the challenges to innovation? Don’t forget to  share the article on social media to stir the debate.