Cryptocapitalism

The total market cap for all cryptocurrencies is hovering around $70 billion (07/15/17). Much has been said about what cryptocurrency, and the underlying technology blockchain, is and how it can be used in the future. Even Vladimir Putin is interested. Many have compared blockchain to the internet in the mid-late 1990s, claiming that one of the many companies that have had ICOs might be the next Amazon or Google. Steem definitely wants to be the next Facebook (or medium!). I can talk about Proof of Stake vs. Proof of Work, Litecoin’s recent UASF to SegWit protocol and how Bitcoin should follow in order to maintain preeminence in regards to market cap, why the Metropolis update for Ethereum is taking so long, why Andreas Antonopoulos (as brilliant as he is) is too idealistic in thinking that Ethereum and Bitcoin will not inevitably be pitted against each other, why most of the ridiculously overvalued altcoins coming to market are backed by nothing more than unproven lofty concepts (i.e. white papers), or how much money I made from a $2,600 investment in ETH last year (hint: $$$,$$$). But today I want to discuss why everyone, from hardcore cryptotarians to astonished hedge fund traders to ignorant Fortune 500 executives, misunderstands an integral aspect of the underlying value in the emerging blockchain economy.

While the code that underlies blockchain is fascinating, an overlooked revolutionary aspect of the emerging cryptocurrency segment of the economy is how it is heralding a new way to fund companies. This new segment of the economy is fundamentally changing our capitalist system at its core. Previously, the only way to get a portion of the general public monetarily invested in one’s company was through having an IPO. An IPO ends up leading to the advent of a robust secondary market that most of the time is highly liquid and can easily be accessed by anyone with a brokerage account. Yet becoming a public company is a messy business. With activist investors constantly lurking in the background, looking for every possible opportunity to hijack a company’s direction in the name of increasing shareholder value, along with shareholder advisory firms and passivist institutions like BlackRock that heavily scrutinize companies based on their ESG policies, going public is no longer an attractive option for many companies. Furthermore, with the advent of Private Equity as a whole, and the Venture Capital portion of PE in particular, companies no longer need to have an IPO in order to raise significant amounts of capital.

The people who undoubtedly lose the most in a system where companies remain private indefinitely is the general public. Well, at least the ones who don’t have a net worth of $1,000,000 at a minimum or have an income of $200,000 a year (i.e. accredited investors). The amount of viable investment opportunities the average American can access has dramatically decreased because companies have decided to remain private. There are less public companies now than there were in 1975, and there are less IPOs every year. While HNWIs get access to the best investment opportunities through the private markets, the average American is no longer able to invest their earnings in companies that often offer the greatest potential for capital appreciation.

Enter blockchain, which is fundamentally altering the very fabric of available investment opportunities for the public. The general public can now invest and potentially indirectly reap a share of the profits in business opportunities that previously could only be accessed by VCs. Founders of early stage companies no longer have to deal with VCs that are often looking for reasons to remove them as executive officers so that they can be replaced by “more seasoned” industry veterans (i.e. someone that can help achieve a quicker exit for the partners). Artists, instead of having to go to producers in order to raise money for their projects, can now allow the public to directly invest in their creations in return for a portion of the royalties or in return for special access to the artist. Foundations can even raise money purely to fund the creation of a particular technical protocol, as Bancor has done.

Yes, many of these companies or protocols that have ICOs will be scams looking to make a quick buck off of dumb money. Yes, the Bitcoin community will have to eventually decide if they want to become truly mainstream, thus compromising some of their libertarian-leaning values. Yes, Ethereum who has partnered with significant blue-chip players like JPM, Microsoft, and Intel in the Ethereum Enterprise Alliance and hosts the most ICOs will most likely maintain their status as the platform of choice for blockchain developers. Yes, Coinbase will probably remain the most talked about cryptoexchange in the US press because of their corporate connections.

Yet eventually, after many ups and downs, we will be left with a democratized funding system that circumvents the current VC and Angel funding infrastructure we have now. Of course, only as long as the government doesn’t over-regulate this segment of the economy. Adapt or die Sequoia, Andreesen Horowitz, and USV. All hail cryptocapitalism.