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Gaining Perspective While Losing Capital

There is nothing better than a rude awakening to regain one’s sense of reality. I’m talking about the latest market meltdown that might have caught many by surprise. 

What’s important is to gain a sense of perspective while trying to analyze what just happened. Taking it from the top, by now, we know what just happened: crypto’s market cap went from a peak of $2.5 Trillion on May 12 to about $1.3 Trillion on May 23, 11 days later. On the way up, the euphoria overtook the sense of reality. As we are down now, we must acquire some wisdom as we shed the reality distortion that accompanied the artificial part of rise that didn’t seem to be sustainable.

What can we learn, and what are my views about what just happened? The full impact and implications will only unravel over the next weeks and months ahead, but here are some thoughts.

The fundamentals behind the blockchain are intact. Due to the acceleration in rising prices, the narrative had gotten a little distorted along the way because there was some hype, and there were claims that were not going to be realized. 

To start with, here’s how I look at the overall blockchain market in terms of segmentation. It might be overly simplistic, but simplicity brings clarity. 

  • Infrastructure – All the so-called L1 layers, and some L2 peripheral technology. 

  • DeFi  – That segment is the locomotive pulling the financial revolution forward.

  • NFT’s – The 2nd largest emerging market, after DeFi.

  • Services – The oracles of the world, including any technologies that rely on blockchain infrastructure and serve the variety of apps or other market application segments. In other words, this is all blockchain middleware.

  • Apps – Where cryptocurrency is used, from financial applications, exchanges and in-app use cases.

We need to go back to a place where adoption metrics matter, if one cares to look at these metrics, and not just at the technical momentum of token prices.

  • If you’re an L1/infrastructure, the number of on-chain transactions, fees, and actual wallets / accounts matter. Speed doesn’t matter more than adoption. The faster car manufacturers are not the ones with the largest market share adoption. 

  • If you’re in DeFi, TVL, volume of transactions, fees matter.

  • If you’re in NFT, since NFTs are goods, it’s an ecommerce story. Revenues matter.

  • If you’re a Services protocol or enabling technology, number of transactions / calls matter.

  • If you’re an App, transaction volumes, number of users and wallets matter.

One of the factors that made the current situation unsustainable was the fact that valuations were a bit unrealistic because the good and the less good were rising in unisson, without discrimination. High valuations were giving a false sense of security to some projects who were thinking, “look, our market cap is high, so we must be doing well”. Meanwhile, upon on-chain transaction volume inspections, it turns out the Emperor had no clothes!

How will we know if the correction is over, or if we have acquired some sense of wisdom?

If everything continues to move up or down in unison, that’s a bad sign. If significant developments from market leaders don’t move prices forward, that’s a bad sign. The herd mentality is an artifact of dumb investing or FOMO jitters. Sell-offs are never rational, but in the aftermath, there is always an opportunity to find value where value is to be found, and to avoid re-investing where the value doesn’t exist. For example, DeFi protocols might be a good place, because DeFi isn’t going away anytime soon. Rather, DeFi is just getting started. Total Value Locked  will grow again, even if some of the yield farming might become harder to find and mine. Rising volumes will make-up for lower transactions fees as DeFi markets become more efficient. 

No more meme or cute animal coins. Please. Social, cultural artifacts are dangerous ingredients to responsible value-based investing.

I’d like to see some of the zombie chains (ones with low to no on-chain transactions) not recover as well as the rest of the market. Further separation between winners and losers needs to happen. In the latest run-up, Ethereum has distanced itself from other “competing” Layer 1 protocols. As Ethereum cemented this lead, it increased its overall dominance, and got closer to Bitcoin on a relative basis, even if the proverbial flippening may have been postponed for a while. 

The reality is that many projects’ treasuries are flush, and can show signs of life even without much to show for. Some protocol tokens have decades of runaway ahead of them, so they could continue faking a lot of activity, fooling supporters, and clouding the rest of the market.

Bitcoin mining is going to get more environmentally responsible, thanks to whistle-blower Elon Musk. The environmental responsibility narrative needs to gain even more awareness. Even if some Chinese miners are making progress in shedding the industry’s bad reputation around carbon emissions, the shift towards less reliance on Chinese mining is already underway, and is a good de-risking move for that whole sector. 

The naysayers are going to repeat their refrains – that you can lose all your money in crypto, and that’s a risky market. Traditional finance is either scared, or in the avoidance phase. However, the demand for cryptocurrency and its many applications is not abating, despite the crypto markets tendency for sadomasochistic behavior. What doesn’t kill you makes you stronger comes to mind.

A market correction is always a good thing when it serves to reset expectations. Hopefully some weaker projects won’t recover as quickly as others, if money gets smarter along the way. If everything starts rising again in unison, it means dumb money is still in the system, so we must be prepared for more erratic behavior.

We will know over the next few weeks.

Friday March 13 2020, AKA The Morning-After

Friday the 13th of March 2020 will be remembered as the morning-after. 

The morning-after North America came to grips with the fact that the Coronavirus is among us.

The morning-after US and Canadian stock markets tanked like they haven’t before, in decades. 

The morning-after global crypto-markets reached lows that set it back to December 2018.

The COVID-19/coronavirus situation has already done its damage, not just to human lives, but to the financial markets, and consequently it has affected people’s wallets, investments, and many businesses that will suffer, at least in the short term.

As if it wanted to punctuate the point, we now know that the Coronavirus has also hit a known Hollywood actor, a top NBA player, the wife of the Canadian prime minister, and the president of Brazil. That’s a good dose of celebrities at once for the mainstream headlines, pushing awareness, fear or knowledge to another level.

I don’t watch the crypto markets on a minute by minute basis, but I did so intermittently yesterday to better understand what was going on. Around 10pm EST, when I saw Ethereum dip into the 90’s and Bitcoin cross below the $4,000 mark, I said to myself – this is now overdone. 

Sure enough, shortly after 10pm, the crypto markets started to bounce back, in part due to short interest covering, and in part due to the traders’ realization that this was overdone.

That said, I expected the crypto markets to do better than the (traditional) markets, and I can’t understand why that didn’t happen. Cryptocurrency should have offered a flight to safety for those who were liquidating their stock equity positions and getting into bonds. Perhaps that was wishful thinking on my part. Others, such as Brian Armstrong, CEO of Coinbase were also surprised.

Either investors didn’t have enough confidence in cryptocurrency as a safe haven, or they didn’t have easy linkages to efficiently enact capital transfers from brokerage accounts into crypto-trading ones. Or maybe it was a bit of both.

Regardless of the real reasons (and there may be several of them), it is noteworthy that during this mayhem, stablecoin USDT’ trading volumes were higher than Bitcoin’s at $52B+ over the past 24 hours. That’s close to 35% of the total market crypto market cap (as of March 13th 2020). That doesn’t necessarily mean that $52B in stablecoin holdings are sitting in people’s accounts, but it could be a factor when demand starts to flow back into cryptocurrencies.

The US economy is getting a $1.5 Trillion stimulus package. What is the crypto-economy getting? Nothing. So, it will need to pick itself up on its own, and grow again. 

This is a challenge that the industry can tackle, and I believe it can do so if we continue executing on the following ideas:

  • Continue working on the best projects that highlight variety and innovation in the application of the blockchain, not just work on the technology itself.
  • Communicate in clear, precise and non-obscure language the benefits of specific implementations.
  • Don’t stop knocking down the barriers with regulators who are erecting them and being tough gatekeepers.
  • Continue funding the best projects, companies and ideas that promise to make the crypto market (as in usage) larger and relevant to the average consumer.

The good news is that the fundamentals of blockchain technology have not changed, and they have not been altered. The recent downturn in market prices is just another stress test on the sector. It can only emerge stronger and better than before, because it has been there before. Extreme volatility is part of the history of cryptocurrencies.

This is not a time to lose confidence, nor lose hope over the blockchain promise. The sector will emerge stronger and more resilient, I am sure about it.


In The Aftermath of Down Markets, What Can We Learn?

In light of the recent price drops in the financial crypto markets this week, I feel compelled to make some comments.

Everyone is wondering what is going, and why are crypto prices falling so precipitously.

In August of this year, we were already at a market cap of $190B, down 77% from the January 2018 highs, as I outlined in this post, The Long Blockchain Crash. In retrospect, that was an early warning for what has happened this week, as total market cap touched $145B and is about where we were in early October 2017. In essence, the gains of the past 12 months have been erased so far.

There is no doubt that prices will eventually settle towards a given bottom (not zero), then we will begin to see the better coins rise again, hopefully less aggressively than before. But the question on my mind is whether the current crash will also flush out some of the bad elements and habits inside the blockchain market. Bad things always take longer to get un-done.

Undoing the Mess

The blockchain market was messy. It is full of cowboy attitudes. We pushed the limits on what tokens could do. And we pushed the limits on how much money was needed. We conflated everything by extrapolating into the future without a real foundation of the present.

Being Humble Again

If we rewind to where we were in 2017, we were more hungry and more humble. Will we return to being more grounded as the dust settles? Yes, ICOs provided a good economic windfall for people and projects, but money doesn’t solve everything. For some people, too much money changes them for the worse, instead of for the better.

Regulatory Storms

Regulatory headwinds and uncertainties have always been prevalent, but the recent SEC actions have turned into deadly storms, with casualties. In retrospect, the SEC is exploited the decentralized nature of the blockchain ecosystem, and poked at its weaknesses. There is no single, strong voice for the industry that has the power to face regulators cohesively, despite a few advocacy groups that were doing their best, given the circumstances. In spite of these action, in my opinion, there is a silver lining because the SEC positions are much clearer now, if you read their recent public statement entitled Statement on Digital Asset Securities Issuance and Trading. And the Singapore authorities also updated their policy with ICO, via this update: Regulator’s Column: What SGX expects of listed companies conducting an Initial Coin Offering (ICO). Both of these updates from two of the most important regulators in the space point to increased clarity, which is a positive.

Security Tokens Expectations

Security tokens are not going to solve it everything, and they are not a boon for getting some of the prospective utility tokens out of the hot water they put themselves in. You still need to have a successful model behind these tokens, and the challenge of getting market traction is not diminished. So, they aren’t going to save everything. This short article does a good job explaining it, Security Tokens Don’t Solve The Regulatory Mess of Utility Tokens.

Accountability Evasion

ICOs lack of transparency is still there. The mess has already been done. For live projects that took money in the past 24 months, now is the time to show real progress. Most ICOs promised the moon and the skies, but few are delivering. The lack of accountability is for real, despite a denial. For those thinking about decentralized governance as the next step, that is not going to solve this accountability dilemma.

Hype vs. Reality

Projects need to curtail their announcements to actual achievements, not conflating their future with promises. We oversold everything. The White Paper is dead. I’ve stopped reading them a long time ago. White Papers are useful if you have truly devised an original technical contribution, but they are not to be used as a marketing ploy to impress and gain credibility.

Better Software

Blockchain software tools are still immature despite 3 of the top ones reaching over 1 million downloads (Metamask, Infura and Truffle, read my post, The Blockchain’s Magical Million Users Club). We are currently trying to do too much with blockchains. For many cases, maybe only 5% of a given application needs to touch a blockchain. Blockchains are not for everything. They are perfect for passing value in a peer to peer manner, but storing everything on the blockchain is still a daunting task.

Too Many Crypto Hedge Funds

I’ve said this many times before. Too many crypto hedge funds were formed too early in the cycle we are in. Many of them will shut down by end-of-year. November 15th was a key date for investors to give notice to hedge funds that they’d like their money back, so hedge funds started to liquidate their positions, precipitating this week’s crash.

What will come out of this last downturn in prices? My hope is that we return to the sobriety days of early 2017 when ICOs weren’t so easily concocted, and when realism preceded fantasy. The sin of irrational exuberance has already been committed. Now, we need to commit to rational reality.

The psychology of bad markets is difficult to pin down. I hope the aftermath of the current downturn makes many of us smarter, and encourages some of us to give-up trying. I hope it brings better products, results and projects to the market. In Web parlance, the real Blockchain 2.0 era has not really started.


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