Frank Szendzielarz
Sep 6, 2018 · 3 min read

George Soros’s comments on bubbles could be applied to cryptocurrency’s story so far. That is not to say cryptocurrency is a bubble in the way most people think of them.

This quote illustrates the concept:

Every bubble has two components: an underlying trend that prevails in reality and a misconception relating to that trend. When a positive feedback develops between the trend and the misconception, a boom-bust process is set in motion. The process is liable to be tested by negative feedback along the way, and if it is strong enough to survive these tests, both the trend and the misconception will be reinforced. Eventually, market expectations become so far removed from reality that people are forced to recognize that a misconception is involved. A twilight period ensues during which doubts grow and more and more people lose faith, but the prevailing trend is sustained by inertia. As Chuck Prince, former head of Citigroup, said, ‘As long as the music is playing, you’ve got to get up and dance. We are still dancing.’ Eventually, a tipping point is reached when the trend is reversed; it then becomes self-reinforcing in the opposite direction.”

Cryptocurrency is a social innovation. Probably for the first time in human history a global platform has emerged that allows counterparties to transact without the need for a mutually trusted intermediary. The potential for social transformation here is as great as the impact the internet and world wide web had.

As George Soros points out elsewhere, ideas themselves can exhibit the bubble life-cycle.

Cryptocurrency and its current potential is the idea. The reality is the given technology and its abilities at any given time, be it Bitcoin, Ethereum or any other. The feedback loop is in one part the effect on the amount of development in extending the capabilities the investment drives, while taking into account the limiting effect live production use has on the flexibility to change. The other direction is in what people think the platforms can actually offer.

The misconception is not about what is potentially achievable. It is about what the technology at any given point in time is capable of.

Ethereum can be seen as an evolution of Bitcoin. It greatly extends the capabilities of the platform, while drawing on its past achievements and momentum.

I have the benefit of a deep technical understanding of many parts of Ethereum. I can see a number of things pertaining to the above and the future:

  • Cryptocurrency, including Ethereum, is in its infancy.
  • The expectations of what can be achieved today are somewhat overextended.
  • Development and introduction of new features is not a smooth, linear process. The limiting factor is the size of the network and code-base themselves. Making important changes to a global network in live usage is much harder than building something new. Real capabilities must be introduced in a coordinated fashion that can take years to prepare.
  • The future real capabilities, such as those enabled by PoS, Plasma, State Channels and other upcoming features, will be much more in line with the great hopes people have for this technology.

With that last point, I think an important crux has been passed: The current suite of platforms like Ethereum, Cardano, and IOTA no longer require radical upgrades in cryptocurrency capability (such as what happened when it evolved to Ethereum from Bitcoin). In my opinion there is no reason to assume that the demands placed by expectation should be fulfilled by anything else radically new. In contrast, I expect that once the fundamental issues of scalability and cost are overcome by the next waves of technical releases, there will be one more boom of expectation overextension, followed by a gradual transition into a new realm, where all of this will be seen as mundane and ordinary.