Introduction: Simplifying the Set of Outcomes
Whenever market volatility flares up, I find it helpful to take a step back and compress the continuum of possible outcomes for the digital asset movement into a simplified case of three potential future realities which I’ll call the Lesser, Equal, and Greater scenarios (think of them like math expressions). In the Lesser case: digitally scarce assets fail to scale effectively in usage and mind-share, and are relegated to the dustbin of history along with other failed innovations, and we see the total cumulative value of digital assets decline along with popular interest as a majority of current developers and investors move on to the next big thing. The Equal scenario sees us treading water from a market capitalization perspective relatively speaking, hovering within the current band on the logarithmic scale (between $100B and $1T simplistically) in a perpetual homeostasis as cryptocurrencies largely remain a fringe asset class with occasional mainstream uses but fail to integrate further into the broader economy. In the Greater case, digital assets successfully address fix the user experience while appeasing regulators enough to scale towards global integration into existing and new economic activity.
Why the Status Quo is the Least Likely Outcome
There’s a scene from HBO’s recent miniseries Chernobyl where Jared Harris’ Valery Legasov diagrams the opposing processes that either accelerated or slowed down the fission reaction within the nuclear reactor. Similarly, there are many forces already at play that either support or oppose the proliferation and adoption of digital assets but arranged and with such magnitude that it’s likely impossible that they’re in perfect balance in a way that we will forever stay at the current exact configuration of market value. An incomplete list of positive factors would include 1) the recipe for scarce digital assets being out of the bag already, 2) massive diversity of parallel tests in governance, monetary policy, utility-based applications being tested on a daily basis and 3) US-specific (election cycle) and global (negative interest rates) macroeconomic factors. Negative factors would include 1) international regulatory awareness and efforts to monitor or clampdown, such as with the recent FATF guidance, 2) centralized incumbent competition (FB, JPM) against open/permissionless networks, 3) headline risk of bad actors (state or rogue) utilizing blockchain technology for nefarious purposes.
Given that the interaction between the positive and negative factors listed above occurs without any central planning or targeted result, and an absence of negative feedback loops that could moderate the dynamic (I argue that positive feedback loops are actually much more prevalent in crypto given the power of network effects), it’s clear to me that we are almost certainly going to be moving away from the status quo, especially as the strength and number of these opposing forces have only increased over the last few years. Thus, the initial conclusion is that we can most likely rule out the status quo as what the future of digital assets will look like.
The Risk of Failure Is Only Moderately Likely
Now that we’re addressed the improbability of the Equal scenario, it’s time to look at the Lesser case and explore what the road to stagnation might look like, and how likely this outcome is. My opinion remains that the biggest risks are 1) major crackdown of cryptocurrencies in the developed world with commensurate restriction of fiat onramps and incrementally negative-biased mainstream news coverage, 2) successful competition from permissioned/private new competition (e.g. FB or even Central Bank Digital Currencies) which chokes out the product-market-fit and value-creation possible on open blockchains, or lastly, 3) negative black-swan events that permanently erode belief in distributed ledger technology (the equivalent of a MtGox-level exchange hack, a major 51% attack / reorganization of a top-10 chain).
Addressing point 1, every day that passes gives me incremental comfort that the odds of a major change in strategy from a top-down perspective grows less likely, whether in the United States, or other major countries like Russia or China, while at the same time, grassroots acceptance at a smaller level will become more likely over time. Within the United States specifically, the battleground has already moved from the Silk-Road era heavy hand and zero-tolerance policy to one where regulators are more focused on catching unregistered securities offerings instead of banning cryptocurrencies outright and have even offered clarity on some of the majors (BTC, ETH) as explicitly not falling under SEC purview. This is against the backdrop of increased general awareness thanks to efforts of both the industry and associated nonprofits like Jerry Brito and the Coincenter folks, with a recent appearance by presidential candidate Andrew Yang at Consensus 2019, an example of something which tips the scales in favor of a crypto-savvy candidate (from a fundraising and issues perspective) versus one that is less conversant on the topic — more on this later in the article. Outside the US, there are increased signs both of an interest in weakening the USD as a reserve currency generally, and specifically signs of détente from countries where cryptocurrencies are in legal gray zone currently — at the end of June, an article from Xinhua, the State-sponsored media in China, noted how some investors view Bitcoin as a safe asset. While Trump is always a wild card especially given the recent news around potentially revisiting the fight on encryption, the pro-business agenda of the traditional Republican platform should be a net positive, though I expect incumbent Wall Street firms to defend their turf against new competitors.
Permissioned competition is also a real risk for the public blockchains, most recently with the Facebook announcement of its Libra project and associated initiatives. Interestingly, I think this fear is the most overblown because we now have data that both the consortium-based B2B approach and centralized B2C approach have their own issues when competing with the more decentralized public chains. I also believe that part of the reason for the market rally towards the end of June was driven by the understanding that there are structural advantages that decentralized cryptocurrencies enjoy versus permissioned stablecoins (including Facebook’s Libra) despite the relative differences in marketing scale and budget. At the same time, the kneejerk Congressional inquiries against Facebook that have been scheduled show the risk of painting a target on one’s back is very real for actual companies developing blockchain products, in a way that bitcoin is immune to. Lastly, while I do think Central-Bank Digital Currencies will be a very real thing, I’m cautiously optimistic that the numerous participants in the informal economy across the globe implicitly understand the importance of financial privacy, and any future attempt to ban or restrict cash usage and possession is a net positive for cryptocurrencies, especially as there will be better fiat onramps, including potentially decentralized P2P channels over time.
Black swans are definitionally impossible to predict and obviously exist both on the negative and positive sides of spectrum as it relates to digital assets. However, I think we have already seen evidence that negative unpredictable events have diminished in impact compared to earlier in the development history of cryptocurrencies. Recent datapoints like the 2019 Binance Hack or the initial announcement of the NYAG actions against Bitfinex saw much less negative price impact compared to historical hacks, suggesting that individual black swan events are less meaningful now than in the past. At the same time, we have yet to see positive (white swan) events get discussed with nearly the same frequency, suggesting they’re less priced in than the most common sources of “FUD” (fear, uncertainty, doubt).
So What’s Left? The Steady March of Progress Over Time
“When you have eliminated the impossible, whatever remains, however improbable, must be the truth” — Sherlock Holmes, The Sign of the Four (1890)
Now that we’ve walked through why both the status quo and meltdown to worthlessness are less likely, it’s time to examine what unique factors could help accelerate the adoption of and thus accretion of value in digital assets. Since project-level fundamentals are well-covered by the body of literature in the space, I wanted to focus specifically on the idea of time itself being an ingredient to the future success of digital assets to reinforce the idea of a structural wave of adoption being probable despite seeming unlikely, after reviewing the even less likely Lesser and Equal scenarios above. Even though most of our parents tried to teach us the virtues of patience, it’s a less that we often tend to forget. With respect to how time will help adoption of crypto, I believe it will be a combination of 1) more and better data generation, 2) increasingly lucrative incentives for political support, and 3) natural integration of crypto into communities as early adopters age. We’ll explore each of these in more detail below.
Supporting Reason 1: Data backfills over time, better and more transparent than existing financial system
One of the bigger misconceptions I continue to hear is the lack of reliable fundamental and pricing data in the digital asset universe upon which to make investment decisions. While this might have been true in the past, data fidelity and sourcing has come a long way even over the last few years that I’ve been following the space. Whether you’re talking about fundamental metrics tracking on CoinMetrics, a more analytical bend on Messari, or looking at ways to tweak your systematic trading strategy using gapless primary order and trade data by stitching it directly from exchanges or licensing from providers like Nomics, there are plenty of emerging providers who are both doing the heavy lifting to clean up and provide statistically valid samples and value-added services (API and otherwise) on top.
At the same time, the structural nature of a 24/7/365 market means that over time, there will be more data and a higher density than traditional markets, such as US equities with the strict 9:30–4PM ET Monday-to-Friday schedule. In any calendar year, a given cryptocurrency trades for ~8760 hours, compared to 1644 hours for a US equity (excluding after-market trades). When you add to this the idea of individual blockchains generally having better transparency whether via direct queries or through tools developed by representative committees both on a live and historical basis, it’s clear to me that there are unique competitive advantages digital assets enjoy over the existing financial system, which would only get strengthened by the addition of best-practices from the legacy world (e.g. a consolidated ticker tape or some kind of NBBO-style execution standard).
Supporting Reason 2: Political Incentives Skew to Being Supportive of Crypto Adoption, Independent of Geography
The longer status quo politicians avoid commenting on the still-controversial topic of cryptocurrencies, the greater the incentive for a maverick-style candidate to be willing to bring it up whether as a way to differentiate their platform and solicit donations. Andrew Yang, a Democratic candidate seeking to win the Primary and challenge Trump in 2020, is a terrific example of the underlying calculus where the newly identified political base of young, energetic crypto-enthusiasts, especially one able to contribute meaningful donations above the national average (if they were early adopters and investors) could be extremely appealing and offer low risk compared to even a few years ago, given the broader understanding of the general public and more overt regulatory rulings ‘blessing’ in-kind donations of BTC and ETH at least. I fully expect we’ll see more candidates use crypto-friendliness as a component of their platform for the next election cycle at the Federal, State, and Local levels, and believe it to be an under-appreciated dynamic at present. Their opponents will likely voice concerns about sources of funds and scare-monger, though the Federal Election Commission has already addressed the issue of bitcoin-based in-kind contributions.
The dynamic of political competition applies to other geographies as well, even ones with greater centralization of political power versus the United States. Theoretically, an autocrat, oligarch, or other wielder of the state’s power (assuming they’re not bad-enough actors to have wound up on a sanctions list) could quietly accumulate a cryptocurrency such as bitcoin, before announcing some mandatory state-level integration of the asset, perhaps in the form of formal treasury reserve holdings, safe-harbor provisions from an issuance/trading perspective or with intentions for more full-some integrations into the local economy. All it takes is one smaller emerging or developing market with a good enough top-down infrastructure to make things happen, and other peers will likely begin to emulate the resulting early success. By diversifying away from fiat-only myopia, there are likely other positive externalities (such as perhaps immigration benefits or more crypto-jobs growth accruing to its citizens) which are hard to estimate for now, but if material, would likely help further with the perceived success of the initiative, whether that country is as strict of a representative democracy as the United States or one with a more centralized source of power.
Supporting Reason 3: Early Crypto Supporters Will Age, Own Businesses, Integrate into Communities, and Raise Children
Last, but not least, I think the longer-term demographic trends sow the seeds for the proliferation and integration of cryptocurrencies when you look at the future on a multi-decade timeframe.
The nearest-term shift to note will arise from a wealth distribution perspective. We already have cryptocurrency enthusiasts gathering in geographies like Wyoming and Puerto Rico, attracted by a combination of meeting like-minded people, favorable tax treatment, and state-level legal protections that don’t yet exist on a national level. What follows is pretty natural: some of the earlier adopters, through a desire to diversify from just coin-level holdings, are likely going to want to own other assets that generate value through more traditional business models. Whether we’re talking about rent-yielding real estate or the local carwash, it’s more likely than not that these businesses, under new management, will be much more amendable to taking a variety of cryptocurrencies as payment either directly or via payment providers such as BitPay and others.
But wait, you say — isn’t crypto enabling a newer wave of digital nomads who move from city to city and avoid putting down roots? Why would they ever want to trade in their liquid and fungible cryptocurrencies in return for idiosyncratic businesses and the headache of operating more within existing systems? The answer is both financial (diversification and value-yielding as opposed to purely playing for price appreciation), and a byproduct of the desire for stability as one gets older, especially as the early adopters age into the demographic of becoming parents. This kind of community-level integration will also enable everyday people to see crypto-enthusiasts in everyday life, further reducing the stigma that the technology itself is morally deficient, similar to how e-commerce initially went from being just the realm of nerds like myself buying GPUs on Newegg or TigerDirect to everybody now eagerly anticipating their next shopping trip on Amazon Prime.
Finally, the next generation itself serves as the ultimate form of long-term structural tailwind to the adoption of cryptocurrencies as early adopters decide to fork off their DNA. Children are naturally curious and are much more able to question the status quo compared to adults. For most of us living today, cryptocurrencies didn’t exist when we were growing up, but for the next generation that is being born right now, bitcoin and all the rest will be available for the curious to read up on, experiment with, and for the industrious among the children (especially given no age-requirements to use), a way to dabble in the workforce earlier than would otherwise be possible, all without being as tied to the old way of thinking where money was assumed to only exist in a fiat configuration. This is even without assuming there are going to be parents who take an active interest in seeking a more balanced (instead of ~100% Keynesian) curriculum for their children’s schooling, or otherwise helping to invite the next generation to actively think for themselves.
Conclusion: Just A Matter of Time
For most of us, time is nothing more than the x-axis of a price chart. However, upon closer inspection, I believe it’s a centrally important, albeit less talked-about factor that itself directly works as a net-positive agent for digital assets, and one I expect will continue to act in consistent, albeit unpredictable ways that ultimately will help realize step-wise awareness, adoption, and integration of this foundational technology.
