ICOs, Darknet Markets, Money: What on earth just happened and What is Next?

Everyone always says “Bitcoin/Crypto goes through booms and busts, this is completely normal and entirely expected” as if there is no cause for the boom and similarly, cause for the bust. This is part of a general attitude shift that I have seen come about over the last 4 years which is around removing a sense of personal responsibility around the success or failure of these cryptocurrencies.

I think 2013 was probably the start of this feeling creeping in. When Bitcoin went from $10 to $1000 from Jan — Dec 2013, there were tens and then hundreds of thousands of people who could sit back, risk their capital (HODL!) and benefit from the huge uplift in price. However that uplift in price was not random chance, it was not inevitable, it was not predetermined. Individuals and events caused it and looking at the cause/effect relationship here is important.

Tony and Stephen at Bitpay were hustling to get Bitcoin to be accepted as payment by every big online business they could reach. Roger Ver traveled around the world handing out bitcoin to thousands of people, teaching anyone who would listen about this revolution. The founder/s of BitInstant, Coinbase, LocalBitcoins and many others were there helping nervous investors buy bitcoin without needing to wiring money to a strange Japanese bank account (MtGOX). Silk Road was having exponential growth in it’s business and while people in the industry do not want to talk about it since these activities are illegal in most of the world, this did cause huge demand for Bitcoin in 2013 and the years following.

In March, the Cyprus Banks gave a huge haircut to every citizen’s bank accounts and bitcoiners flew in left right and center to help Cypriots buy bitcoin as a way to escape capital controls and the confiscation of wealth. Videos like this one convinced people around the globe that bitcoin was an alternative to fiat-based money systems that could fail in all kinds of ways. I was doing large OTC trades in the UK and building Coinfloor and had fully committed myself to working in crypto markets for the rest of my life. Chinese investors started pilling in and at that point we thought, maybe this is it, maybe we will ride this all the way to $1M per Bitcoin without interruption. The news suddenly had less to do with adoption and events and mostly to do with the price. Headlines like this one were basically entirely to do with a numerical price and had nothing to do with adoption, technology or anything fundamental.

We rode this wave in 2013 and at that point a Bitcoin investor could wake up, browse reddit, get rich. Until you couldn’t. MtGOX was hacked and all of a sudden many things were thrown into question. A huge number of investors lost money, many were wiped out and for the next 12 months we had a slow grind 80% lower.

After those 12 months we went through another 2 years where the price meandered around the $200–800 region where most of the inflows and outflows into crypto were related to movement of funds and in particular, Chinese capital controls. Then in 2017 the “ICO” craze emerged and captivated the world. This was really interesting because what started as Altcoins being invented to try and threaten the dominant position of Bitcoin and Ethereum as revolutionary forms of money, ended up becoming something very different: a new form of raising capital for “companies”.

Promise of ICOs: Issue securities to retail without regulators

• Immediate liquidity for investors in something that resembles a startup and had the potential to grow 10x, 50x, etc.
• Startups and projects could raise capital with ZERO obligations to “investors” since issuing tokens was somehow not equity, not a loan, not a promise of any kind. In fact many token whitepapers would include disclaimers indicating the investor was basically donating their money to these projects.
• An extremely volatile “token” that could trade 24/7 on exchanges and be “pumped” and “dumped”
• Most importantly: A legal grey area where you could advertise and fund-raise investment from “unsophisticated” and “retail” investors without being registered or regulated as a public company. Since after all, these are “tokens” not securities.

Problem with ICOs: The Margins on a Scam are near 100%

• Investor dollars went largely to ICOs with the best marketing and buzz
• The problem here is that the profit margin on a scam is 100%. That means in a pure scam, where John Smith raises money on a promise of future actions and then does nothing and keeps the money for himself, he has made a 100% profit. Doing any work whatsoever would mean a sub 100% profit margin.
• While ICOs had been going on for a while with zero enforcement actions from government regulators and zero derivatives tools to bet against them, the market became efficient and ICOs began spending more and more money on marketing buzz and legal costs.
• Many “mom” and “pop” investors were wiped out, especially by scammers.
• Not all ICOs are scams! Some actually delivered (or are in process) meaningful products that can be used in the real world. However ALL projects made the same assumption: It is legal to do an ICO.

Difference between ICOs and Darknet Markets

Then Everything Changed. The SEC in the US started cracking down on ICOs and seems to be making it very clear they view these as Illegal activities. This is a very different event from the 2013 Crypto Bubble bursting. The 2013 Crypto Bubble was based on a form of adoption (Darknet Markets, capital flight) which was commonly understood to be black market or grey market activity during the bubble. Many investors invested as a result of Bitcoin’s capability to be used in black and grey markets as it creates a “fundamental” demand akin to concept of a “Petrodollar”. Pre and Post Bubble, the world viewed these activities the same way: black or grey. There was no state change.

The difference with this bubble is people thought ETH/crypto could be used as a tool to legally raise money from retail via an ICO. The common understanding was that this was either a grey market activity or a completely “legal” activity. It seems that at least in some markets, this could change to being a full on black market activity.

What is Cryptocurrency?

2014–2016 gave us a beautiful chance to think about what cryptocurrency actually is. This bear market gives us another chance to once again reflect. Which cryptos have lived up to their aims, goals and ideology?

Bitcoin Cash and Bitcoin Core are attempting to be Money. Store of Value, Medium of Exchange and Unit of Account. They are trying to replace Gold and the traditional fiat currency through limiting the supply to 21 Million and by decentralizing the issuance, governance and transaction processing. Bitcoin Cash is trying to work for billions of people around the world on one network. Bitcoin Core is attempting to be something anyone with a laptop can verify the entire transaction history. I would say both are for the most part living up to these promises, with Bitcoin Core having Medium of Exchange issues during times of high throughput on-chain.

Ethereum is attempting to be programmable Money. Smart contracts, more complex rule structures and a Turing complete scripting language. These smart contracts make it more risky than the Bitcoins, but also more flexible. Will Bitcoin’s multi-sig and escrow smart contracts be enough? Perhaps, but it’s worth having a second option if Bitcoin (Cash and Core) do not work out and that second option happens to be something very feature rich and capable.

Then you get other types of competitors attempting to be money such as Monero and ZEC, which may have a huge role to play in the future. The vast majority of other coins and tokens are ICO or project oriented tokens that are not attempting to be Money. As earlier mentioned, the world is now questioning whether these are legal and whether they have value.

Where do we go from here?

Regardless of how the ICO legal and pricing debates play out, it seems clear now that the future advancement of crypto will again come down to it’s adoption as Money. The global cryptocurrency community have spent a brief 18–24 months exploring using crypto as a way to exploit potential loopholes in securities regulations. The Token Economy will continue on in some shape or form, for example as Stablecoins or Trade Driven Mining Tokens or other innovations. ICOs may even find a way to come back, either fully black market and pseudonymous or somehow regulated. But wherever that goes, crypto needs to focus on the biggest market in the entire globe: Money. Fiat currency is $70 Trillion Dollars vs $130 BN for ALL of Crypto.

You can certainly be a bystander in all of this. You can HODL and hope that somehow for some random reason, your crypto of choice becomes the main form of Money and goes to the moon. You can not own crypto and make fun of all of us that have seen paper (or real) losses this year.

Or you can chose to act and take responsibility for the success or failure of crypto as Money. Use it day to day. Setup your friends with wallets and send them some BCH or other crypto. Build something amazing that that makes it easy to use crypto in day to day transactions, in contracts, in loans, as collateral, in remittances and capital flows, in anything people use money for today or in some completely new use case for Money that hasn’t ever been possible before.

I can’t claim to be able to see the future. No one knows where this crypto journey will take us. My point here is rather simple, yet exhilarating: Where we go from here is entirely up to you.