Crypto Crash Ushers New Epoch & Fresh Opportunities
Anyone familiar with the technology cycle will be amazed at the speed with which blockchain and cryptocurrencies evolve.
October 29, 1969, UCLA student Charley Kline attempted to do the impossible at the time — transmit the text “login” to a computer 350 miles away at the Stanford Research Institute over the first link on the ARPANET, the precursor to the modern internet.
After the letters “L” and “O” were sent, the ARPANET crashed, making the first ever message sent over the internet “LO.”
Which may be exactly how cryptocurrency investors are feeling at the moment, given the “abysmal” state of the markets.
Yes, that’s right, “abysmal” was the term being bandied about in some relatively newish cryptocurrency circles in cities from Miami to Singapore.
But zoom out of our current epoch and even when you read this piece, I dare say that Bitcoin is likely to be worth substantially more than whatever it was as recently as 2017 (let’s hope this paragraph ages well).
Because one investor’s “LO” is another investor’s high, the most recent rush to cash in on the apparently boundless opportunity of cryptocurrencies has been marred by Bitcoin trading at almost half of its most recent all-time-high.
And yet that may be an altogether good thing.
Cheap as Chips
By one account, cryptocurrencies have lost some US$1.35 trillion globally since November 2021, more than their entire total market cap as recently as 2017, which has been a disaster for many of crypto’s newest investors.
Recall that cousin of yours who wouldn’t shut up about Shiba Inu at last year’s Thanksgiving — you might want to ring him up and ask him how 2022 has worked out for him since he dropped out of community college.
While the psychological (and actual) losses of most cryptocurrency holders (“hodlers” in the parlance of the cryptosphere) may grate, the harsh reality is that it also affords the crypto-skeptic an opportunity to nibble at the fringe and enter the cryptocurrency ecosystem at a lower price point, exactly what the cryptosphere needs.
It’s highly unlikely that Kline or any of his colleagues at UCLA imagined back in 1969 that the internet would look anything like it does today, or that the applications developed would become so indispensable to modern life.
From what we eat to what we believe, no aspect of life has been left untouched by the internet and even more will continue to be when the Metaverse gets into gear.
In the 52 years since “LO” was broadcast over the ARPANET, the hardware which has conveyed digital communication has gone from dial-up internet across copper lines to fiber-optic cables to 5G networks.
And improving infrastructure has made possible many of the applications that we take for granted today, from streaming videos to e-commerce.
The “rich” network that internet users globally take for granted today were just as clunky at their inception as blockchain and cryptocurrencies are today.
In the same way that the dial-up internet couldn’t support rich content like YouTube, current blockchain technology as we know it can’t support the myriad transaction applications that would rival the payment networks of Visa or Mastercard.
Nor can decentralised finance or DeFi yet hope to dethrone the legacy (and highly centralised) financial and monetary system until many of the kinks associated with user-friendliness and interoperability are ironed out.
Even more significantly, cryptocurrencies need to achieve sufficient critical mass to allow for their widespread acceptability as a legitimate means to transfer value (I deliberately avoid the use of the term “payment” because that is far too narrow a perspective) for goods and services.
Work in Progress
Yet companies from card issuers like Visa and Mastercard, to some of Wall Street’s biggest banks and financial institutions are doing just that — preparing for a day when cryptocurrencies could potentially become a significant means for the exchange of value, and to ensure that they’re not left out in the event that such a revolution takes place.
If then, crypto is poised to provide a whole suite of useful services, which I personally believe that it is, how we view them (and price them) today, will be significantly different than a decade from now.
Just as the dotcom bubble and bust was more a function of technology not keeping up with hype, the 2017 initial coin offering (ICO) bubble was a product of opportunism meeting an immature but potentially paradigm-shifting technology.
With no shortage of hindsight, 2017, when Bitcoin reached its then all-time-high of close to US$20,000 can be officially declared a cryptocurrency bubble.
In mid-2017, investors fell in love with ICOs the way many of them lusted after dotcoms in the late 1990s and early 2000s.
Yet ICOs were not new, having been around since as far back as 2013, with the first token offered on the then still new Ethereum blockchain in 2015 being Augur, a predictions market place.
To be sure, 2017 saw no shortage of incredibly important projects, many of which have matured since then, but also no lack of over-hyped and marketed shams or outright scams with at most a veneer of technology or practical use cases.
Because it couldn’t have been possible for ICOs to develop genius applications for cryptocurrency and blockchain technology week after week for the better part of a year, that bubble was doomed to bust eventually.
But the market didn’t know it yet and a huge amount of money went into a variety of wasteful projects, much of that money spent on ill-conceived champagne yacht parties and environmentally-ruinous supercars.
Fast forward to our current epoch and application is coming at the expense of hype — investors have become more savvy and cryptocurrency project teams more credible.
Real People, Real Projects
Technological use cases for both cryptocurrencies and their underlying blockchains are being developed far more meaningfully and some of the world’s most discerning investors and brightest developers are going all in to the space.
Data from Pitchbook revealed last year that venture capitalists poured over US$33 billion into cryptocurrency and blockchain startups, more than all previous years combined.
And of that amount, a staggering 46 per cent went to projects already valued at US$100 million or higher.
While most of the services which the decentralised internet of cryptocurrencies and the blockchain are promising aren’t available yet for mainstream use, investors can be sure that given sufficient support, development is more an inevitability than a purely aspirational endeavor.
Which is why investors punch-drunk on the easy-money days of touching a cryptocurrency and expecting monster returns in a heartbeat might be over — it is far more likely that the long-term value of cryptocurrencies are robust, but that the current price declines are driven by risk and liquidity issues.
Victim of Circumstance
If nothing else, the plunge in cryptocurrency prices isn’t necessarily the result of a newfound skepticism that decentralisation is inherently flawed, but rather a response to the prospect of tighter monetary policy by the world’s major central banks.
An unpleasant mix of potentially (and I use the term “potentially” because the U.S. Federal Reserve has committed to a policy of strategic ambiguity with its “nimbleness” doctrine) higher real interest rates, lower valuations for the most speculative of companies, coupled with geopolitical uncertainty has created a backdrop where investors are heading to stuff their mattresses.
And while all that is bad news, it isn’t necessarily bad news for cryptocurrencies specifically.
Higher interest rates in the present make the future appear “less valuable” in present discounted terms, but amazingly, cryptocurrencies have no special place in that calculation — they are being hammered just like every other asset and investment in the future, just look at Cathie Wood’s ARK Innovation ETF.
The major difference is that technology cycles move far quicker today than they did in the past.
Because technical infrastructure to support high-speed internet is far more developed today than it was in the 1970s, many of blockchain’s most intractable limitations are likely to be solved not by hardware, but by software, requiring a unique blend of disciplines, from behavioral economics, to law, software engineering to Game Theory.
But given that development of cryptocurrency is limited by imaginative solutions rather than physical limitations, investors can expect that technology cycles will be far shorter than when it came to the early development of the internet and its most basic applications.
Decentralise This
In the over five decades since “LO” was transmitted over ARPANET, the centralised internet that we know today has created tremendous value for users but concentrated even more value for platform service providers.
From search to e-commerce, social media to finance, today’s internet users are not receiving their fair share of the value proposition from rapid digitalisation, instead, technology companies are.
Which is where the prospect of the decentralised internet, web3 if you will, comes in — an opportunity to remake the implicit bargain of utilising the online services we know and love for free, but ensuring a fair compensation for the data which we as users provide to platform service providers.
And maybe, in an idealised post-Metaverse world, an opportunity for cryptocurrency holders to have a say in the development of a network, service or blockchain.
All of this may seem like science fiction at the present, and in many ways, it is.
But for the researchers at UCLA and the Stanford Research Institute, so too would have been the prospect of livestreaming or buying groceries over the internet.
As technology cycles shorten and development quickens, many of these mini-boom and bust cycles in cryptocurrencies must be viewed from the societal value that the technology brings, not necessarily the price that value commands at the present.
To quote legendary macro investor Warren Buffett,
“The stock market is a device which transfers money from the impatient to the patient.”
So are the cryptocurrency markets.
By Patrick Tan, CEO & General Counsel of Novum Alpha
Novum Alpha is the quantitative digital asset trading arm of the Novum Group, a vertically integrated group of blockchain development and digital asset companies. For more information about Novum Alpha and its products, please go to https://novumalpha.com/ or email: ask@novum.global
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