“Expectations vs Reality” by Chris Burniske, Placeholder VC | Fluidity 2019

The Bitcoin Technological Revolution

Which Phase Are We In?

Harry Alford
Jul 22, 2019 · 7 min read

Bitcoin, blockchain technology, and cryptocurrency, in general, allow for the complete automation of the financial world. With the infrastructure built around Bitcoin, everything will be done in the background enabling more liquidity and accessibility to people. This will create a more decentralized financial world taking what used to be highly complicated transactions and distilling them down to simple clicks. People will have unprecedented freedom in the next technological revolution.

Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages by Carlota Perez is an academic book that seeks to describe the connection between technological development and financial bubbles as seen in the emergence of long term technology trends. Perez believes the deployment of an enormous wealth-creating potential brought forth by each technological revolution requires an adequate socio-institutional framework. This framework, where both financial and production capital plays crucial roles, is carried on a recurring sequence about every 50 years by new entrepreneurs, risk-takers, and financial tycoons.

A technological revolution can be defined as a “powerful and highly visible cluster of new and dynamic technologies, products and industries, capable of bringing about an upheaval in the whole fabric of the economy and of propelling a long-term upsurge of development.” There are two periods in which this technological revolution transpires, each lasting about three decades (“Technological Revolutions and Techno-Economic Paradigms.” Cambridge Journal of Economics. 34 (1): 185–202.):

Installation

The installation period is when the new technologies irrupt in a maturing economy when the previous paradigm begins to confront the limits to its potential. This period is ushered in with a big bang advancing like a bulldozer disrupting the established fabric and spreading new ways of doing things. This consists of two phases:

Irruption phase — There is intense funding of innovation in new technologies. Clusters of new revolutionary inventions appear. New industries are established, and the construction of new infrastructure begins.

Frenzy phase — Increased speculation and financialization leads to a decoupling between financial capital and production capital. Capital is invested more in financial innovations than in technological innovations. Asset bubbles are inflated.

Deployment

There is a turning point from installation to deployment and it’s a crucial crossroads, which usually means a serious recession involving a recomposition of the whole system. This consists of two phases:

Synergy phase — Growing inequality and political unrest. A need for political regulation of the financial sector is acknowledged. Asset bubbles may burst. The link between financial capital and production capital is repaired.

Maturity phase — The market for the new technology begins to become saturated. Social structure and infrastructure have adapted to new technologies. Opportunities for investment are decreasing. The idle financial capital is moving to new sectors and new regions where it may lay the foundation of the next great surge.

According to Perez, there have been five technological revolutions: the industrial revolution, age of steam, age of steel, electricity & heavy engineering, age of oil, automobiles & mass production, and age of information & telecommunications. Each revolution begins with a financial bubble that propels the rapid installation of the new technology. Then there’s a big bang followed by a recovery and then a long period of productive growth as the new technology is deployed throughout other industries, society, and peripheral countries. Revolutions play their course until the next one begins. Below is a table showing the previous technological revolutions with the last part unfinished (the first book edition was published in 2002):

Which brings me to my question, are we in the midst of the sixth technological revolution and witnessing Bitcoin’s installation period? I’m not quite sure as it hasn’t reached a turning point where painful processes of implosion mark the end of the frenzy phase. However, I do believe it satisfies several characteristics of the installation period mentioned in the Perez framework:

  • A highly visible attractor — a big bang — symbolizing new potential and capable of gathering a cluster of pioneers (entrepreneurs, innovators, investors)
  • Resistance from its predecessor
  • Induction of a paradigm shift
  • Makes it easier for others to follow suit (consumers)
  • The mutual influence between technology and politics
  • Surges of development
  • The disdain of old assets
  • Financial capital becomes highly innovative

In 2008, at the height of the Great Recession and Occupy Wall Street, Bitcoin’s creator Satoshi Nakamoto proposed a “peer-to-peer transfer of virtual cash that would allow online payments.” One year later, the first Bitcoin block was mined. At this present day, 10 years later, Bitcoin is embarking into what I believe to be the frenzy phase of the installation period.

Some have spoken with certainty that Bitcoin and blockchain will be a technological revolution. Few have pinpointed the exact timeline as these phases are hard to see in real-time. Fred Wilson, Co-Founder of Union Square Ventures, hypothesized this paradigm on his blog in 2015:

“I’m not going to guess if we’ve seen the “collapse phase” of the Bitcoin technological revolution, or if we are in it, or if it is coming. But if Bitcoin and Blockchain is going to be a meaningful technological revolution, and I think it will be, then we are going to move from the installation phase to the deployment phase at some point and there will be a major financial break point that happens along the way.” — Fred Wilson

Most recently, Chris Burniske, Partner at Placeholder VC, spoke at the Fluidity 2019 conference on the topic of, “Expectations vs Reality.” Referencing Perez’s framework, Burniske argued:

“We are in the frenzy. 2017 kicked off the frenzy of crypto where financial reality will increasingly divorce from the underlying utility. The expectation premium will be the greatest in the market. And so, in the coming years, we’ll enter the second bull market of the frenzy. The expectation is going to outpace reality. While the financial fervor may be just as fierce, in the next crypto bubble it’s unlikely the tech will be where the Web was in 2000.” — Chris Burniske

The previous technological revolutions built new technology while relying on an existing financial structure. What makes the Bitcoin technological revolution unique, according to Burniske, is that “We are tinkering with both the technology AND the financial structure. This combo of innovation is going to be explosive.”

“Expectations vs Reality” by Chris Burniske, Placeholder VC | Fluidity 2019

With every new legitimate token that’s introduced, the network will strengthen. The density will drive production and value up. Peripheral countries that don’t have access to traditional banks will now have control over their finances. Through algorithmic technologies, like Project Libra and Coinmine, consumers are gaining unprecedented access to new financial products like never before. Massive exposure to the masses gives Bitcoin attention, adoption, and “much needed political momentum.” Regulators and politicians even acknowledge the innovation can’t be killed.

Acknowledgment from political figures has taken some time to catch, dragging on regulations. Entrepreneurs have had to build and facilitate their fundraising mechanisms. In December 2017, the price of Bitcoin peaked at roughly $20,000 on the rise of ICOs. Blockchain startups had tremendous access to capital from non-traditional investors to VCs and corporates. ICOs took a major hit in 2018 and even been declared dead only to see it evolve in 2019 with Blockstack’s token sale becoming the first SEC-qualified offering in U.S. history.

Blockchain Trends In Review

Still, even if ICOs are dead, traditional equity financing has outstripped ICOs in every quarter since Q3 2018. CB Insights stated in a recent report:

“However, given the recent spike in coin market capitalization, it seems unlikely that the space is dead. Traditional venture capital is now seen as a signal of quality, especially coming from smart money investors.

And in the world of tokens and cryptocurrencies, confidence is rebuilding and more money is entering the asset class.” — CB Insights

We’ll know when we’ve entered the second half of the technological revolution when the whole fabric of the economy is rewoven, reshaped by Bitcoin’s modernizing power and the U.S. Government deeming Bitcoin mining as critical infrastructure.

As decoupling occurs in the frenzy phase and investment flows into new areas during a turning point, regulatory changes will be made to facilitate the deployment period. Soon there will be a time of reckoning within the next decade when we as a society will be faced with a difficult recessive situation. All signs are pointing towards it being likely with the China trade wars, economic gloom in Europe and Iran’s gold-backed coin. Regardless, deep cultural and social change will persevere. It’s really rare for technology to solve the challenges for rich and poor people but Bitcoin does this. Republic CEO, Kendrick Nguyen, tweeted, “Blockchain will open up most financial products to the average Joe and transform the entire sector in the process. DB’s 20K lay-off plan is just the beginning.” Bitcoin and blockchain’s technological potential will shape the next 50 years and we’re just getting started.

Through Perez’s framework, I’ve gained a greater appreciation for dynamic bubbles and golden ages. Additionally, it provides a good deal of insights into how to identify recurring sequences in historical patterns, which is especially advantageous for those providing production and financial capital — entrepreneurs and investors. As Fred Wilson said, “The lesson I’ve learned in my career is to invest in the post-crash cycle. When you do that and do it intelligently, you are rewarded greatly.”

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Harry Alford

Written by

Business Development, Coinbase

humble words

Stories and lessons about startups, innovation, diverse founders and those building solutions for diverse audiences.

Harry Alford

Written by

Business Development, Coinbase

humble words

Stories and lessons about startups, innovation, diverse founders and those building solutions for diverse audiences.

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