2018 was a tumultuous year for crypto. We saw prices crashing from all-time highs, with bitcoin losing almost 80% of its value from $19,000 at its peak in December 2017 to below $4,000 towards the end of 2018. In the first 6 months of 2018, 689 ICOs took place raising more than $17.5 billion, over double the amount of capital raised over the whole of 2017. This number fell drastically in Q4 in line with falling prices, with only 39 ICOs taking place in December 2018 compared to 144 in May 2018.
In my last year’s predictions, I anticipated that increased regulatory pressure would help professionalise ICOs and allow them to develop into something more than purely speculative tools, this was overly optimistic. I also expected to see institutional capital moving into the market at a faster pace. Finally, I hoped we would see the launch of several projects tackling scalability and performance of existing crypto networks, this only just starting to take place.
2019 may well see crypto prices building a bottom as well as continued consolidation in the number of market players, but it will no doubt play an important role in laying the foundations for a more sustainable ecosystem built upon real value added as opposed to speculation. As Anthony Pompliano puts it nicely, “bear markets get rid of the tourists so that the true entrepreneurs can focus on building sustainable value.”
Layoffs, Refunds and Wind-downs
The tail end of 2018 saw a spate of layoffs across high profile crypto companies. Consensys announced it would be laying off up to 60% of its staff, Status let go of 25% of its employees as did Steemit and bitcoin mining giant, Bitmain, amongst others. The UK alone saw 342 crypto companies shut down, 200+ of which had been incorporated the previous year. In line with this trend, 86% of 2017 ICOs are now worth less than their original listing price. I anticipate that many of these will eventually become valueless as adoption fails to materialise or as competition pushes utility token prices down to the cost of the underlying resources required to power the network.
Regulatory pressure did indeed build up over the course of 2018, leading several companies to shutter their doors. Most notably, Basis, a stablecoin project which raised over $130m from prominent Silicon Valley VCs, was forced to cease operations and to refund investors. Similarly, in mid-November, the SEC announced settlements with Airfox and Paragon, requiring them to register their tokens as securities, to pay a $250,000 fine and to reimburse its investors. Over the next year, I suspect many more projects which raised via an ICO will face a similar risk.
Regulatory pressure combined with falling prices and low adoption will undoubtedly result in further wind-downs, adding to the list of Dead Coins. Unfortunately, shutdowns will not be limited to crypto projects and are likely to include crypto funds as well, as explained by David Nage in the following article.
Forks and upgrades
Over this year, wind-downs will go hand in hand with numerous code forks and upgrades. Given the open source nature of crypto networks, in the long run, forks are inevitable particularly as developers realise that for many projects there is no need for an underlying native payment token. DDEX, a prominent decentralised crypto exchange, has recently announced it is forking the 0x protocol and removing the underlying token in an attempt to better serve users. Similarly, we are starting to see projects emerging that offer identical value propositions without native tokens (e.g. Uniswap vs Bancor or Connext vs Raiden).
Bitcoin and Ethereum will both experience upgrades and forks in the quest to achieve scalability. Most notably, Ethereum’s Constantinople fork will see miner rewards fall from three ether to two, decreasing the block time and significantly speeding up the network. Likewise, Bitcoin will most likely undergo a soft fork as Schnorr signatures, a way to make transactions cheaper and faster and increase privacy, are implemented. This will be coupled with continued progress on Layer 2 scalability projects such as Lightning Network.
Consolidation and M&A
The bear market has inevitably led to an increase in M&A activity. Crypto mergers and acquisitions increased by 200% in 2018 with approximately 145 deals taking place throughout the year. This is set to continue as larger companies take advantage of low prices. Established players such as Coinbase and Circle will continue to consolidate their positions through a spate of acquisitions similar to the Earn and Poloniex takeovers which took place in 2018. Large international exchanges will acquire smaller exchanges in an attempt to expand into new markets. I also envision we will see more M&A by traditional tech firms such as Amazon and Facebook, which have both already announced they were working on crypto initiatives.
The Tokenization of Everything
The narrative in 2019 will shift away from ICOs and utility tokens to security tokens, which unlike their counterparts give holders recourse to profits or revenues and are subject to securities regulation. The tokenization of traditional financial instruments such as stock, bonds, loans, private equity and venture capital investments will become increasingly common. The advantages of tokenizing these assets are that compliance can be hard-coded, the assets can be fractionalised, making them more affordable for some investors, and much of the back office, auditing and settlement processes can be automated reducing transaction fees, amongst other things.
2018 already paved the way for a number of tokenized fund launches such as Blockchain Capital and SPiCE VC. Following on from this, 2019 kicked off with an announcement from DX.Exchange that it would offer digital tokens based on shares of 10 Nasdaq-listed companies including Apple, Facebook and Tesla. This will give traders the ability to gain exposure to Nasdaq stocks even when the exchange is closed and allow buyers to purchase a fraction of a share. This trend will continue throughout the year, with traditional companies also launching their own security tokens as an alternative to crowdfunding or going public. We will also see the proliferation of projects aiming to tokenize real assets, from fine art to real estate and automobiles, amongst other things.
As it stands, there is a lack of infrastructure to support the issuance, compliance, custody and trading of these assets (platforms such as Harbor and Polymath should help fill the gap). Moreover, because there are very few regulated security exchanges currently in operation generating liquidity for these tokens will be a challenge. As a result, I suspect many security tokens will struggle to generate adoption in the short term and it will take a lot longer than a year for them to move into the mainstream.
Whilst the bear market has led some cryptocurrencies to hit all-time lows, stablecoins have largely benefited from recent volatility. Over the last 3 months, the four leading fiat-backed stable coins (USDC, True USD, Paxos and the Gemini dollar) have been used to facilitate over $5 billion in on-chain transactions. Moreover, 1.8% of total Ether supply is currently locked up as collateral for Maker Dao, the leading collateralized debt stablecoin. There are now over 57 stablecoins either live or in development and this number is set to increase throughout the course of 2019. In fact, Facebook recently announced it is developing its own stablecoin, that will let users transfer money within WhatsApp. I wouldn’t be surprised if several other tech giants followed suit.
Not all of these stablecoins will succeed, but a handful will start to gain prominence throughout the year, providing security for crypto investors seeking refuge from traditional cryptoasset volatility and a quick way to re-invest when the opportunity arises. In the short term, I suspect most stablecoins will be primarily be used as parking vehicles for crypto investors rather than as conduits for peer-to-peer transactions or payments.
Over the last year, institutional adoption proved slower than expected, with plans to launch futures and crypto trading desks being postponed by many. Some institutions made headway, with Fidelity launching its crypto custody and trading arm, and Goldman leading a near $60 million funding round in crypto custody provider BitGo. This year is off to a good start as Nasdaq has announced it will list bitcoin futures and the Intercontinental Exchange (ICE), the NYSE’s parent company, will finally launch Bakkt, a crypto trading platform which should allow the entry of large capital from institutional investors. However, in order for widespread institutional adoption to take place further high-grade infrastructure (custody, trading, compliance) will need to be built out and it will take a lot more time for large corporates to finally get comfortable around the risks and regulations surrounding this new asset class.
Given the above, I expect 2019 will be focused around building rather than driving mass adoption. Increased regulatory pressure and a prolonged bear market mean that unfortunately many projects will wind-down. However, many will persist and perhaps go on to become household names in the next decade. Hopefully, this will be the year that crypto moves from being a primarily speculative asset class to one with real underlying value.
Shoutout to Ha Duong from Cambrial Capital for the great feedback!