When to Invest in Blockchain
This research article provides insight into the areas of opportunity for blockchain investment and product building
Although this article states our opinion on the blockchain space, none of this should be perceived as investment advice. We urge readers to do their own research.
2019, the right time to start a blockchain project; not yet time to get back into the crypto market
The origins of Blockchain have taken on a certain mystique ever since the original bitcoin white paper, “Bitcoin: A Peer-to Peer Electronic Cash System” was published by the ever ambiguous Satoshi Nakamoto. Viewed by many as an innovative solution to “the double-spend problem” that plagued multi-site databases, Bitcoin looked to be the first viable way to solve that problem using a decentralized approach.
Fast forward to 2017 and outside from Bitcoin and Ethereum, there were no real solutions in production, and even then neither of these two systems had yet demonstrated wide spread business uses. Furthermore, during 2017 there was an explosion of public token offerings (‘Initial Coin Offerings’ or ‘ICOs’) used as a way to crowdfund blockchain based projects. These ICOs helped build up the hype around cryptocurrencies and blockchain technologies.
During 2017 there were 875 ICOs that raised over $US 6 billion and this trend stretched over to the first part of 2018 with 1257 ICOs that raised a total of $US 7.8 billion). However, by the 2nd Half of 2018 the signs were clear that the ICO heydays were quickly ending. However, let’s not confuse investment interest with product maturity.
In their 2018 annual review of technology adoption, The Gartner Group published their Hype Cycle (see below), positioning Blockchain on the downward slope into “the trough of disillusionment.” What this indicates is the mainstream investor sentiment as well as the likelihood of early builders funding. As sentiment plummets, money is scarce.
Where is Blockchain on the Product Life Cycle?
There is a natural curve of increased product maturity over time as we can see from the product life cycle chart below. Given that most software technologies take between 10–20 years to reach maturity, we are somewhere early in the growth stage with Blockchain. This can also be seen with the ever increasing number of jobs being posted on recruiting sites for the blockchain sector. Burning Glass Technologies estimated that the number of job postings went from 1,838 in 2016, to 3,958 in 2017 and that number climbed past 5,000 in the 4th quarter of 2018.
In the early days of blockchain solutions there was a focus on “clear business solutions.” The problem was that these solutions turned out to be duds. As is the case with most new technologies, it takes a couple of iterations to come to the “right” solution to problems. For example when the ‘.com’ era started, there were a plethora of sites like Pets.com and Toys.com that were built for a single solution. Furthermore, the big issue to be solved was not the online storefront, but delivery. It took several years for these solutions to shake out and the emergence of Amazon and other integrated storefronts with delivery.
Many of the first iterations in blockchain were in fin-tech and were built by the banks. These projects were proof of concepts and with one or two examples that ended up collecting dust. Now we are seeing solutions emerge that get rid of banking intermediaries entirely. During the last few years another phenomenon has been the explosion in blockchain technology platforms both for private and public instances. And like all technologies, it takes a while for them to shake out, the weak to die off leaving a handful of stronger competitors. So, now that we are several years into the blockchain evolution, the technology and business winners are set to emerge with those hardened business cases.
Overlaying the Product Life Cycle with the Hype Cycle
If we now superimpose the Hype Cycle chart over the product life cycle chart, we should see where investment sentiment is ahead of tangible delivery and where the product maturity is ahead of the hype (appropriate value to invest). In the graph below, the height of the investor hype has been anchored to January 2018 when the ICO market peaked. At this point we’re mixing investor sentiment (hype cycle) with product sales.
From this comparison, there are three distinct areas to note:
- Nascent Market Investors → Period of Ideal Speculation,
- Market Builders → Period of Ideal Innovation,
- Value Investors → Period of Long-Term Investments.
1 . Period of Ideal Speculation
The period of ideal speculation starts when the nascent technology moves “from the lab” to businesses. At this point the investment is almost entirely based on the dreams of the inventors, or at least on how well they tell the story. The first trick is to find out about the market at all. It would be great if we were each the first person to invest in a new technology (i.e. buying two pizzas with 10,000 bitcoin in 2010) especially if we picked the early “winners”. But that is the other side of the coin — which technologies will jump out of the others in terms of value? And, how to pick investments that can become liquid in ‘the right time frame?’ Depending on your willingness to take risks, the ideal time to investment is at the beginning of the “hype cycle” where there is some clarity to the technology yet very significant investor upside (Shown in grey section in above chart). This period for blockchain was about 2014 to early 2017. Although there were still very significant investment opportunities right up to the end of 2017, the best period was before that.
2 . Period of Ideal Innovation
In the past 10 years blockchain technologies have been plagued by numerous challenges like scalability, cost and security. However, there are a number of solutions to these on the horizon from platforms like Ethereum (projects in Ethereum ecosystem) and others. As a result, the economics of solutions built on these platforms is starting to make sense. Furthermore, issues like scalability are being addressed by the core platform so that developers don’t have to turn themselves into knots by employing “side chains” and other architectural decisions to get to reasonable scales. The final piece to the puzzle will be data security and with that, the elimination of private or consortium blockchains will be possible. At that point, one could expect that about 5–10 platforms will dominate the market with the top 2–3 taking another 1–3 years to become evident.
That being said, we are now into the third (or greater) generation of blockchain solutions and the weak platforms are dying off. Most development shops have people with several years of experience on staff. It is now the right time to build solutions before the market really takes off and staffing becomes too expensive.
3 . Period of Long-term Investments
Following the ideal innovation period comes the ideal long-term investment period. Why? The technology is robust or nearly there; the market isn’t over-hyped and costs are manageable. This is also the right time to invest in crypto-currencies as the market will have sorted itself out and the early speculators will have left the market after “the crypto winter”.
If we overlay the product lifecycle curve over the Gartner Hype cycle, there are three key areas of interest:
· Period of Ideal Speculation — The ideal time to speculate was from 2014 to early 2017.
· Period of Ideal Innovation — Starting now.
· Period of Long-Term Investments — Probably starting in 2 years. This needs investigating.
Implications of Assumptions
There are three basic assumptions in this research:
- There is a correlation between the hype cycle and the product life cycle curves
- There is a consistent scale correlation between the two
- There is a consistent time correlation between the two
Given that both are time based on the X axis and dollars (albeit market size in one and investment size in the other), it is logical to assume at least some correlation.
In this analysis we assumed that the scale of 100% of $ is comparable between the two graphs. That is to say that when the market is at its peak of hype, that translates to the peak valuation of the market in terms of sales. Is this true? This is a topic that needs to be further researched.
With that being said, if the product life cycle curve is 25% higher or 25% lower, the net result isn’t that different for the three areas of opportunity — just the size of each opportunity.
Lastly, it is safe to say that you can anchor the Gartner Hype cycle for blockchain with the apex of the hype at the height of the ICO market (January 2018). The question then is what is the time scale for the blockchain Product Life Cycle? We can anchor this curve at 2008 and we can assume that the technology will be mature in somewhere between 20–25 years. The question is when is the peak reached? For that, only time will tell.