Blockchain Has a Game-Changing Future… So Stay Patient My Crypto Friends!

As much as I comment about futurology subjects, I haven’t talked much about cryptocurrencies. I have sat back and observed what I can best describe as the Wild West.

I remember a few years ago when it was mostly a small group of super-enthusiastic fans. They would have meetups and generally discuss the ideological merits of crypto. I agreed with a lot of their sentiments and was a definite long-term advocate. But as an early enthusiast, I saw nothing more than a financial gamble. I stayed away and continued observing.

Then a year ago, the mania started. Speculators entered the industry and predictably touted their “get rich quick” schemes. It had all the trademarks of asset bubbles I had either experienced or read about: people telling me they might quit their job and live off their crypto gains, taxi drivers proactively giving me investment tips, etc. Being in finance, I knew that the appreciation rate was not backed by fundamentals and was classic hype. Again, I stayed away.

About six months ago, I started looking into ICOs. I was intrigued by this so-called revolutionary capital-raising process. Skipping the hyperbole, I dove straight into the white papers and VC pitches. And I came away flabbergasted, as I didn’t find a single one that tempted me. I saw a lot of half-baked business ideas that didn’t benefit from using blockchain, lacked any strategic sophistication, and were clearly trying to skirt securities law in funding their business. But “investors” were filling their rounds and enabling a successful raise. I followed my gut and stayed away.

Over the last few months, crypto prices have declined and my various news and social feeds have been bombarded with panic. There are a lot of “I told you so” type comments from naysayers. And a lot of “reassurance” commentary from advocates, which sound more like they’re trying to convince themselves that everything will be ok. I still stay away.

Why have I stayed away at each stage? The industry is far too obsessed with asset prices. I want to see more focus on the fundamentals. Because I know they exist today or are in development. I think cryptocurrencies and the underlying blockchain technology are revolutionary. And I want to see the serious technologists, businesses, investors, and commentators emerge from the rubble of speculators, scammers, and hype-pushers. I know they exist and are working diligently behind the hoopla. That’s when we’ll see the real innovation and business models that drive mass adoption.

But since we’re at the very preliminary stages of the innovation curve, I thought I’d offer a few notes on the subject. Perhaps I’m offering assurance to those losing or lacking faith in blockchain. But mostly I want to offer a logical reflection of the current state rather than the emotion I commonly see. Here are a few random thoughts on what I like and why I’m starting to follow blockchain so much more closely:

I. The price movement we have seen is normal.

The lofty gains didn’t signal a product taking over the world, nor do the recent declines signal a failing product. It really comes down to a few lessons from your Economics 101 class.

First, the price fluctuations were caused by normal supply/demand. And since cryptos have a nearly fixed and transparent supply, demand solely influences price movement. We have had world events that were obviously increasing demand and thereby contributing to sudden gains. Chinese citizens used it to store value and transact off-shore until the government banned it. Venezuelans used crypto mining to earn during an economic depression and transact under strict capital controls. Indians jumped into crypto after their government suddenly banned certain cash denominations and threw their banking system into instant turmoil. Currency depreciation in Turkey, Argentina, Iran, and South Africa spurred a lot of sudden demand. And none of this considers all the media coverage that led to vast speculation.

Second but related, cryptos are very immature markets. Large events can have outsized effects on the market. Few are transacting, investing in securities, or saving money via cryptos. It is largely a hedge or speculative activity right now. Better infrastructure will inevitably emerge causing everyday use to grow, prices to stabilize, and value to be less susceptible to news or events.

Third, currencies and any other good are priced relative to a standard exchange medium. In our current world, that is US dollars. That means price fluctuation is merely a reflection of demand relative to that other exchange medium. If we priced bitcoin relative to the Venezuelan Bolivar, an entirely different story materializes. The dollar is the global reserve currency, ensuring consistent demand. And in uncertain times, it historically fares well as a flight to safety. In today’s volatile world and in crypto’s volatile market, it’s not surprising to see it as a stable alternative to Bitcoin’s erratic demand.

Finally, price discovery is a good thing. Every market needs to land on a price where supply meets demand. We will see what that price is over the long-run.

The main point is that price is irrelevant unless you’re speculating. Whether bitcoin is worth $15,000 or $7,000 or $10 makes no difference to those involved over a long-term or building sophisticated, sustainable business models from the technology. One price or another doesn’t signal whether cryptocurrency is a viable long-term asset class, can be used as a currency replacement, or whether blockchain has industry value. Entrepreneurs, VCs, or corporates looking at this industry should be paying zero attention to cryptocurrency prices. It means nothing relative to their use cases or objectives.

II. The treasure is not Bitcoin, Ethereum or any other specific crypto.

It’s the concept. The narrative remains the same as when Satoshi Nakamoto wrote the original white paper for Bitcoin. And it has only improved with blockchain’s wider uses and other cryptocurrency differentiation.

Long-term, Bitcoin might become worthless. That both possible and sensible, as it has no value beyond what we collectively believe has value. Ditto for all the other well-known cryptocurrencies. And any fiat currency. And gold. But that doesn’t mean the CONCEPT dies with it.

We will always require a means of exchanging good/services. There will always be a requirement to store value safely. Cryptocurrencies have tremendous value in terms of decentralizing both functions. And the benefits of blockchain are ground-breaking in many ways.

This won’t change no matter how a specific cryptocurrency fares. Governments, businesses, and households will search for the best solution. That’s not yet crypto, except in the most unstable markets. But the potential exists and many smart people are working to get it to that point. I think it will eventually be best and will retain value as a speculative investment until it does.

So let’s take a long view of it. Let’s focus attention on the best solution rather than a single speculative currency as a proxy for the concept. We don’t critique paper currency’s future based on how the Zimbabwe dollar performs. We’ll get to industry goals much faster without the noise.

III. There is still much to improve.

That was true during the price rise and is still true during the fall. The problems are well known:

• The price fluctuates too much to be a proper store of value (even intraday).
• Transaction costs are too high and they occur too slowly.
• There is no remedy for losing your private key or other security issues.
• Electricity consumption is ridiculous for mining.
• Scalability is a major issue.
• Legal and regulatory issues are too vague.

The list goes on. We’re in very early days and things will change drastically. We’ll find solutions to today’s problems and encounter new ones. Crypto companies will rise and fall. Use cases will be tested — some will work and others won’t.

In our instant gratification society, some think that we can snap our fingers and change the world. A price decline is good in rooting out speculators and those that don’t understand the technology. It will allow the real industry players to focus and make incremental changes that eventually do change the world.

IV. ICOs are spectacular. But few are really getting it right.

I really like the ICO concept for many reasons:

I’m not a big fan of the traditional VC model where power is centralized in large investment firms.

1. It prevents the innovation that’s needed in venture capital, while giving excess leverage to investors.
2. It democratizes the founder’s ability to raise capital for their unique needs.
3. Fundraising regulation is outdated. While regulators might ultimately get it wrong, I think this gives them a chance to modernize.

I’m far from a regulatory cheerleader. But I’m very optimistic that ICOs being treated as securities will end up being a positive. A few thoughts:

• On a very obvious level, this will chase away the scammers and the bad money. It enables more attention for the legitimate investments. Likewise, it removes the ambiguity that probably kept a lot of people on the sidelines.
• Securities law has a lot of important benefits. The obvious ones are to ensure investments are registered and monitored, and to prevent investors from being taken advantage of. But a very underrated one is forcing businesses to formalize what they are offering. I notice a lot of ICOs lack the diligence that would ordinarily be required. Reporting standards. Tax accounting. A proper org structure, business registration, and banking. Current state financials. Accountability on how you’ll use the funding. Legally enforceable terms for what investors are entitled to in exchange for funding (debt payments and claim, equity, voting, etc). Financial reporting and material business disclosures. And legal precedent and enforcement as needed.
• I think we’ll see ICOs go beyond coins whose investment appeal are strictly based on appreciation. The supply/demand of these coins support appreciation. However, most ICOs I’ve read miss one critical point. Why is a coin REQUIRED to operate the business? Why is blockchain even needed? Why can’t we transact in other currencies or payment systems? The companies that truly need blockchain will continue raising by ICO but I think regulation will knock out the duds.
• I think regulation will enable traditional financial products to be represented via coins. Others will opt for tokens that represent debt, equity, or other financing products. And then coins are traded on a secondary market via blockchain, similar to how debt and equity markets trade today.
• Assuming more fundraise through equity and debt financing, blockchain enables this to a much greater degree. Ledgers will store investment records, security ownership, and contractual terms. Smart contracts automate the terms and conditions. And investors can gain greater transparency into the invested companies with financials and other reporting linked to the blockchain. Ordinarily, we need expensive banking and legal services to execute such arrangements. By using blockchain enabled services, it lowers cost and increases access for both businesses and investors.

ICOs are a bit worrisome to me in their current state. But I really like the potential once we see them mature and gain regulatory oversight.

V. I have a lot to learn and so do most in the industry.

It needs to mature like every other new concept. There is still so much I don’t know about the crypto world. I admittedly don’t follow the hundreds of cryptocurrencies and have probably only read a small fraction of ICO white papers. My technical skills aren’t up to par with industry developers. And I will learn much more about how various industries make use of this new technology. I can anticipate blockchain business trends but the technology is too new and immature to know exactly what the future holds.

This is the case with everyone. Some are immersed in this world. However, consider that it will impact almost every industry: finance, real estate, government, law, and so much more. These are very established industries with entrenched interests, processes, technologies. It will be very slow moving.

But there’s one thing everyone knows. It has tremendous advantages versus much in the status quo. We can easily see countless potential use cases and why this offers improvement. This will not change.

I’m excited to learn more every day. I expect some of my predictions to come true and to be proven wrong in others. Exciting times when so much potential is at hand.

VI. Currency dogma is not what will make this mainstream.

Crypto enthusiasts recognize the disadvantages of fiat currency. To them, they believe it should be obvious why we opt out and all adopt crypto. But realistically, this will never happen.

• Will every government in the world decide to give up control of their greatest power (money)? I don’t think a single one will. Study history for five minutes and you’ll understand that this will never happen.
• Will every person simultaneously give up the currency where all their wealth and income are denominated in? Of course not. The average person doesn’t care whether they exchange value using a coin, paper, plastic, a smart phone code, password, or anything else. They want safety and convenience. And aside from a few failing states, most have that and will continue to have that. Government will guarantee it and if faith deteriorates, they will require it.

So if cryptos don’t replace fiat currency, what is the real value? If you’re always exchanging back to your fiat currency of choice, crypto becomes nothing more than a temporary hedge against instability, a payment system, or a speculative asset. It won’t compete with currency in that scenario.

But don’t worry, I’m a crypto bull long-term. I just see it being mass-adopted in a different way. I think virtual reality will be the driver.

To understand why, you have to envision a world where VR is far more developed than its current state. I expect that VR will eventually be so realistic and widely used, it will replicate going to another planet. So for comparison sake, imagine you did go to another planet. Say a group of us colonized Mars. We would need to adopt a new currency. Dollars, yen, euros, and gold would be worthless there (unless the Mars government assured their value). So in this scenario, if Bitcoin was the best currency option, the Mars government and colonists would be likely to adopt it.

Let’s go back to VR and assume it gets as big as I anticipate. We put on our headset and are transported to another world. It’s a place where we immerse ourselves in social activities, simulations, entertainment, and games. We go to work, school, and shop in VR. It’s a user created world with everything we wish was possible in the real world. Technically, we’re starting from scratch. We need a medium of exchange. So why not Bitcoin or an alternative crypto?

Since VR exists online, it makes further sense. We need a medium that is agnostic of geography and whichever fiat currency is used locally. Something that can be used to transact digitally and has all the decentralized properties that a decentralized VR world needs. Finally, we need a virtual currency to price the virtual assets that will ONLY exist in the virtual world. Examples of this might be virtual land, virtual businesses, virtual IP, and virtual design. It wouldn’t make sense to price and transact virtual assets in real-world currencies, just as it wouldn’t make sense to price a Mars house in US dollars.

Many don’t buy into my VR vision because this is another industry that is extremely immature. Headsets are not quite good enough in their first release, content is still sparse, and there are many other issues still being solved. But I expect we’ll see a Ready Player One type of VR world at some stage. And I think this will be how crypto goes fully mainstream.

Blockchain, meanwhile, will already be fully mainstream due to its many use cases in real-world industries. Those use cases are too numerous for this article (but I’d love to delve into them!).

Concluding

The main point is that blockchain and cryptos have a bright future. But when we focus excessively on price swings, we dilute the most important story. I’d love to see those in the industry stop focusing on specific cryptocurrencies and either cheerleading or defending pricing. Adopters ought to focus more on blockchain use cases, sustainable business models, and how we’re solving crypto’s biggest technical challenges. That’s where we’ll get the revolutionary change!

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