The concept of the Crypto-Market crashing is somewhat of a misnomer. From a market-pricing perspective, it certainly did crash over the 12-month period. This was caused by an asset bubble created at the start of the year in Bitcoin and, to reuse a famous quotation, “Investor exuberance” across multiple coins and tokens. Profits from Bitcoin flooded into other assets on irrational economics and hypotheses. Money was taken and spent by good and bad actors on projects with limited commercial viability and illogical business models. With the emergence of Bitcoin futures, constant selling pressure from short-sellers prevailed, driving the price of Bitcoin lower and spreading across the cryptographic universe. The more liquid tokens, such as ETH, had been used as an investment proxy into multiple ICOs. These were liquidated to fund fiat currency costs exaggerating the ETH move lower. The less liquid tokens failed to deliver on token holders’ perceptions and became extremely volatile. The frenzy was exasperated in the final part of the year as increased Bitcoin futures selling was initiated by hedge funds looking to short “Risky assets” to hedge their technology exposures in traditional markets.
However, in the midst of this “Crypto-Market” crashing, the underlying fundamentals and macro-economic picture for the Blockchain asset class has improved dramatically.
- The demise of irrational “Tokenomics” has allowed traditional Venture Capital investors to review and invest into viable business models at logical financial metrics. Business models are no longer simple ideology but have become commercial with clear plans for mainstream adoption. Liquidity has entered into the space at the project level (as opposed to the token market) which creates a distorted perception of reality and capitalization of the Blockchain asset class.
- A clear polarisation of the sub-sets of the asset class has been established between security tokens, utility tokens, and currencies. This analysis has enabled investors to differentiate value propositions. However, this was not represented in token market pricing as everything performed with a beta relationship to Bitcoin. For example, the fundamental business model of EOS has no relevance to Bitcoin or Litecoin. The current market for tokens is irrational, driven by technical factors and that in itself presents possible opportunities for the rational long term investors.
- Regulatory oversight, tax treatment, and compliance is a positive event for the asset class. It is the acceptance that it is being taken seriously and not a death knoll for decentralization. This in itself facilitates the entry for traditional investors to broaden the liquidity base.
- Transaction speeds, costs, and friction have been significantly reduced in the latest iterations of software. The obsession with decentralization and everything onchain has been replaced with a pragmatic approach to optimization per use-case with a blend of off-and onchain activity with varying degrees of centralization to ensure project architecture is fit for purpose. Going forward, it is clear that the technologies encapsulated in Blockchain are now developed and accepted. The innovation curve is flattening, and the next phase will be execution and adoption from enterprise users and thereafter consumers. Projects that focus on managing token holders and market prices at the expense of their strategy will fail. Those that secure strong symbiotic capital partners with correct alignment and incentives to build for long term value creation have the highest probability of success.