The Appeal (and the Angst) of Crypto (Zero-to-expert journey, Part 3)
In my first two zero-to-expert posts, I shared some basics about what cryptocurrencies actually are and some fundamentals about the crypto marketplace.?And while I’m convinced that the blockchain technology that makes cryptocurrency possible is the future of everything – I’m not oblivious to the pro-crypto / anti-crypto narratives playing out across the headlines.
If you missed Part 1 and Part 2 of this series, I recommend you give them a read if you are have little understanding of crypto. In this post (part 3), I offer some insights on some of the Tale of Two Cryptos narrative unfolding across our news feeds, and from which schools of thought these narratives are rooted. I’ll basically touch on
Opportunities Fueling the Crypto Frenzy
Think about the dozens of technologies over the past decade or so disrupted by the introduction of the smartphone: digital cameras, mp3 players, handheld video games, GPS devices, alarm clocks and watches, desktops, printers and more. In the early days of the iPhone (circa 2007), it would have been impossible to see the trajectory that our digital lives would take as the iOS platform developed and the app store exploded with new offerings. Yet, the innovations delivered through this handheld platform have demonstrated just how much and how quickly convenience and be improved and adopted. Many (myself included) see today as the “2007 moment” for another disruptive technology, one that will innovate away expensive middlemen, clucky handoffs and friction-riddled processes. We are seeing the early days of a new blockchain-enabled world. (Again, Part 1 of this series offers a brief blockchain overview for those unfamiliar.)
?Foundational Improvement Opportunities
Just rent a car. Plan a wedding. Apply for job. In performing these common (yet frequently frustrating) activities, we Just rent a car. Plan a wedding. Apply for job. In these common (yet frequently frustrating) activities, we?experience the inefficiencies as we copy and paste the same information into three different places of the same form. We watch our time wasting away as we are forced to make reservations and appointments, only to have to wait in line upon arrival. We’ve come to expect 4-hour visits to the DMV and 4- to -6-week homebuying processes. Because of the constraints of the physical world, we wait, and we waste, and we fume (well, I fume), knowing that there is a better way that this XYZ process might have been managed.
Creators and Developers within the crypto community see the clumsy handoffs and duplicative efforts as use cases. They see better, faster, more secure ways to verify identify, validate funds, and transfer custody of assets. Where society has been programmed to think days and weeks, these blockchain innovators think minutes and seconds.
Consumer Investment Opportunities
dBlockchain project value through reduced churn, time efficiencies, new capabilities and better, more private and secure use of data. They enable new ways for consumers to directly fund, govern and participate in project development. With traditional corporations, value may show up on a balance sheet or in the form of quarterly earnings per share. For crypto projects, value creation is captured by a project’s “token” and distributed across the project community (the tokenholders). To a bystander this might look something like the launch of the Blockchain projects?deliver real value through reduced churn, gains in time efficiency, new capabilities and a more private and secure use of data. They enable new ways for consumers to directly fund, govern or simply just participate in the development of the products and services they use. In traditional corporations, the value created may show up on a balance sheet or via the quarterly dividends paid out to stockholders. For crypto projects, the created value is "tokenized" and distributed across the project community (the customers ... the tokenholders). To an outsider looking in, this may look like just another launch of yest another random crypto currency. I may look like the release of the?Reallt?token which supports a blockchain-based mortgage process. Or it may sound like the rollout of yet another cryptocurrency platform, like, say, the launch of the Everleger ecosystem?(a blockchain-based asset tracking network). It might all just look like a daily frenzy of meme coins gobbled up by enthusiastic crypto investors obnoxiously chanting “to the moon!” Regardless of how its viewed, the energy around crypto comes from the people who see the real life potential for this technology to change the way the world works for the better, and their ... our belief that the value to be had will make this shift towards the blockchain enabled world inevitable.
Ecosystem Building Opportunities
Now consider the meteoric rise of crypto-related service providers who are seizing opportunities to drive faster adoption and support greater technology integration. We have seen this with the rapid rise of Coinbase and Binance, two of the largest cryptocurrency exchanges, each created to offer the everyday retail investor opportunities to learn about and invest crypto projects. We have seen other innovators, like Ledger and?ConsenSys rollout entire portfolios of offerings to service cryptocurrency holders, such as specialized wallets, security services and blockchain application development tools.
Investors across the globe are lining up fund such efforts and are being handsomely rewarded with double and triple digit returns on those investments that are addressing real life needs.
?So, is this a bubble? Is it a tectonic shift? Is it something in between or something entirely different? Answers will come in time. What I am certain of today is that the excitement about the possibilities of crypto is forcing many to rethink old ways of doing business and seeking new ways to create on-chain (blockchain-based) value.
The Angst Surrounding Crypto Investments
While the net positive value that crypto could deliver is coming into focus, many are starting to recognize that much of the low hanging benefits come from its ability to cut steps (and players) out of the value chain. The allure of crypto comes from its ability to shift power and agency away from large, centralized institutions (“the gatekeepers”) and towards individuals (“the people”). And as these gatekeepers grow to realize that the promised pound of flesh is supposed to be coming out of their pockets and that the gatekeepers are seen as the ones who are going to fall on the “obsolescence” side of the blockchain transformation, they are reacting to this possibility with denial, disbelief, and angst.
Institutional Investors
Over the past year, as unfathomable investment has poured into the crypto market, mainstays of the traditional institutional investment community like Jamie Dimon, CEO of JP Morgan Chase, refuse to recognize any of the value crypto has to offer. To many who have built careers within the tradition investment banking, crypto is seen as fantastical hype that could never meet the actual needs of the market. From within their price-to-earnings ratio worlds, they believe only in monetary policies and fiat-based financial instruments. That understand the language the language of Wall Street and the politics of Washington. They do not comprehend a peer-to-peer market, and they do not see where their sophisticated models and hard-learned realities intersect with the fairy tales of the cryptocurrency market. And because of this, they have hardened their resolve to “protect their customers” from the risk and volatility of the cryptocurrency part of the market.
Meanwhile, more progressive investors are seizing opportunities to add crypto exposure to their portfolios with a resounding “BUY” as they fuelled the rapid rise of the first cryptocurrency electronic trading fund approved be the Securities and Exchange Commission (SEC) and offered via the mercantile exchange – pushing the Bitcoin futures ETF to $1 billion in assets under management in just two days following its debut! [By comparison, it took three days for the first gold ETF to achieve $1B in assets under management.]
Web 2.0 Power Players
Big investment firms are not the only entities being put on notice.?Consider our evolution from an analog world to one filled with microchips and nanoprocessors. Our earliest analog-to-digital transition introduced us to renown innovators like Bill Gates and Steve Jobs, who provided the power of computing to everyday people. The rise of online services, rooted the open-source software movement (web 1.0), introduced us to intellectuals like Richard Stallman who framed the concept of free software in his 1985 GNU Manifesto, and Linus Torvalds who built the cornerstone of the open-source environment with his advent of Linux.
Those too young to remember a pre-smartphone world, may look to the creators of the early online shopping and social media environments (web 2.0) – Facebook creator Mark Zuckerberg and founder of Amazon.com, Jeff Bezos – as the most instrumental to our analog-to-digital transition.
Regardless of your generational alliances, the maturity and adoption of blockchain technology will move us from the into a whole new realm of digital peer-to-peer interactions (web 3.0), and away from the traditional peer-to-gatekeeper-to-peer model of today’s web 2.0 platforms (Facebook, Amazon, Google, etc.). As this happens, these companies will see old business models erode and consumer expectations shift. Just advancements in telecommunications enabled people to directly connect to others through phone calls and text messages replacing the need for intermediaries like switchboard operators and telegram services, the advancements in web technology (web 3.0) is driving those businesses built around stewarding information and data on behalf of internet users to rethink the value they can provide in the new web 3.0 (peer-to-peer) world.
Regulators
Perhaps the biggest angst of crypto currency investment sits within the halls of government institutions. The adoption of cryptocurrency has raised increasingly important questions around how it will fit within legacy regulatory and compliance environments.
The unique and innovative nature of cryptocurrency enables it to serve the world in many different ways: as a store of value (an asset), as medium of value exchange (a currency), as fungible economic resource to be used for trade (a commodity), even as a product or service, such as a service to validate of ownership of an asset or providence of a good (authenticating), or to offer low cost and innovative lending services without a credit history (banking). It is cryptocurrencies very dynamic ability to play so many roles simultaneously that makes it so valuable to innovators and so challenging for regulators.
The uncertainty around the regulatory treatment (or even the proper regulatory jurisdiction) of cryptocurrency continues to seed confusion within the crypto markets and frustration throughout the crypto developer community. We need only to look at the politics surrounding the Infrastructure Bill this past fall to see this confusion/frustration narrative play out.
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In August 2021, the closely followed US Senate vote on a $1 trillion infrastructure package was delayed as the crypto community reacted to the last minute U.S. Treasury Department provisions added to the bill, which contained overly broad language about the taxation of cryptocurrency as one way to fund portions of the proposed infrastructure package. The chaotic scene that followed revealed both a lack of understanding by Congress about how the cryptocurrency industry worked (despite Congress preparing itself to enact new laws around this bourgeoning technology). Many across the crypto community saw this as just more political positioning by the US Treasury using this must-pass bill by the to attempt gain increasing Treasury controls over an industry posed to disintermediate it.
Meanwhile, while the U.S. government is still formulating its thinking and official positions around this new technology, various political officials haven’t been shy about verbalized their disdain for cryptocurrency and the potential for its widespread adoption.
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"Crypto is the new shadow bank … It provides many of the same services, but without the consumer protections or financial stability that back up the traditional system … It's like spinning straw into?gold”
–?Senator Elizabeth Warren (New York Times)
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"What looks like a very interesting and somewhat exotic effort to literally mine new coins in order to trade with them has the potential for undermining currencies, for undermining the role of the dollar as the reserve currency, for destabilizing nations …"
– Former US. Secretary of State Hillary Clinton (Bloomberg New Economy Forum )
?Central Banks
Such comments appear to be rooted in fear over the loss of government control. Traditionally, monetary policies set by the Federal Reserve and the fiscal decisions made by the US Treasury Department have been used to manage the economic conditions in the US and beyond. Mass adoption of a borderless currency that is not influenced by government policies would significantly reduce the effectiveness of the Fed and the Treasury. Notably, however, it is for this very reason that countries like Venezuela, Zimbabwe and Ukraine are considering allowing Bitcoin to serve as legal tender for their citizens. The transition to Bitcoin would offer some freedoms from the increasingly mercurial policies being pushed by the U.S.
In fact, in September 2021, the world watched El Salvador become the first country in the world to approve Bitcoin as legal tender. We also saw similar concerns playout in China, which took an approach opposite of El Salvador as it implemented a series of bans on crypto-related activities in order to preserve the State’s ability to monitor economic activity of its citizens.
?Recently, China took an even greater stand against Bitcoin by launch the first ever government issued digital currency – the digital yuan, which provides similar digital currency services to Chinese users, but with the added ability for the Chinese State to monitor the economic activities of its citizens.
The concept of government-issued digital currency or Central Bank Digital Currencies (CBDCs) is becoming increasingly popular with the rising threat of government disintermediation due to Bitcoin adoption. As of October 31, 2021, 90 governments, including France and the U.K., have begun exploring how CBDCs might be issued in their respective countries (Atlantic Council CBDC tracker).
What happens next?
I’ll close the by noting that it is not evident to me when the next burst of energy, be it a headwind or tailwind, might blow through the cryptocurrency space. Today, I can only offer with confidence that cryptocurrency has the power to unlock new value across every industry if the regulatory frameworks were clear and impartial. Again, as with any new technology the Gartner Hype Cycle is alive and well, and I do see peaks and busts across the crypto market as the winners begin to separate themselves for the aspirational but unviable crypto concepts.
In the meantime, I continue to reflect on the brilliance of a young Steve Jobs who, decades before he changed the world, spoke of what he saw around corners we have yet to even turn.?
I can’t help but think the blockchain is one of the tools that will carry us around one of those bends very soon.
Be on the lookout for more from me as I share more from deep inside the rabbit hole.
?WDY think??Will the U.S. get its regulatory act together so that this industry can launch full speed ahead?. Did you learn something? Did I miss something? What’s your take on the the Hatfield's and the McCoy's of crypto? Feel free to comment if you have adds or corrections, message me if you have questions, or feel free to share with others if you find this informative.
?Also be on the lookout for more zero-to-expert postings from this series as I share more from deep inside the rabbit hole.
Coming up:
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Other posts in this series:
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