If you’re anything like me, you’re probably standing around and watching the charred remains of the cryptocurrency industry and market wondering what happened. Like everyone else, I bought in to the idea that Cryptocurrency was going to revolutionize money, financial services, bring the banks to their knees, and that this would all happen in a short period of time. Failing that, I figured that the hype would last long enough for the technology to catch up the with the revolution. So what went wrong?
Asking the question what went wrong is probably the wrong question. The right question is why did cryptocurrency explode? Cryptocurrency was a bubble that burst. If we can adequately explain why the market peaked at a capitalization of over $800 billion USD at the start of 2018, I think we’re on our way to explaining why cryptocurrency is now worth so much less (around $120 billion USD at the time of writing). If we look at the history of cryptocurrency over the last couple of years, it’s pretty easy to see why every man and his dog started shoveling his life savings in to something that has worked more like a ponzi scheme than anything else. It’s also pretty easy to see why institutional investors started circling in which created a climate where digital currencies started to encroach on the role of the stock market for investing purposes.
I must start this article with a few disclaimers. Firstly, I’m a programmer and technologist – not a financial advisor or market analyst. I am here merely speculating about the market, and I have no formal qualifications that make me any better at figuring out what’s happening than the next guy. However, part of the case I am going to make is that this is true of most of the people who fueled the fire of the cryptocurrency bubble. Secondly, I want to make it very clear that I am a huge supporter of cryptocurrency. I do see cryptocurrency as a revolutionary technology, and I do believe that it will change the world, but slowly, and probably in subtle ways. If anyone doubts my commitment to cryptocurrency, check out my Github page. I’ve spent so many hours contributing to the cryptocurrency ecosystem over the last year, it would be impossible to speculate how much time has gone in to that. You know what that they say: “you only hurt the ones you love”. I use the term “bubble” to describe the massive investment in cryptocurrency at the end of 2017 and start of 2018 that burst somewhere around the start of February 2018.
It’s important to start by looking at the difference between Bitcoin, and Ethereum, and how they were marketed. Satoshi Nakamoto was interested in creating an ‘Electronic Cash System’ (Bitcoin Whitepaper). As far as I can tell, the word “blockchain” doesn’t even appear in Nakamoto’s original whitepaper. This is very telling. The whitepaper does not exist in order to create hype about the “blockchain”. The word “block” is used over and over as a technical explanation for how data is stored. The word “blockchain” was only applied to Bitcoin after the original concept was thought up. The goal of Bitcoin was to
allow online payments to be sent directly from one party to another without going through a financial institution
What Ethereum intends to provide is a blockchain with a built-in fully fledged Turing-complete programming language that can be used to create “contracts” that can be used to encode arbitrary state transition functions, allowing users to create any of the systems described above, as well as many others that we have not yet imagined, simply by writing up the logic in a few lines of code.
The contrast could not be more stark. Bitcoin’s goal is very simple, and Ethereum’s goal is very complex and ambitious. The average person without much knowledge can get their head around what Bitcoin is designed for, but the average person will never understand the purported goals of Ethereum, or the consequences of such an ecosystem existing on the internet. When the Ethereum whitepaper was written the term “blockchain” was already in existence and it was emphasized heavily in the paper. This isn’t to disparage Ethereum – far from it. There is certainly a place for Ethereum in the landscape, but what resulted from Ethereum’s creation changed the way that the cryptocurrency landscape unfolded.
The words “blockchain” and “decentralized” suddenly became household names, and were touted as cure-alls for nearly every kind of business and logistical problem you can think of. Blockchain technology is deliberately redundant and inefficient. Blockchains are essentially databases that get copied to computers all around the globe called “nodes”. These computers alone eat power and that’s not even close to the power that gets eaten by cryptocurrency mining rigs which are required in massive volume to solve the issue of double spending that Nakamoto talks about in his whitepaper. For those that don’t understand, centralized computing is generally far more efficient than decentralized computing. In essence, centralized computing is the situation where processing is done in one central location by one computer (or cluster of computers taking turns) and is not duplicated. Decentralized computing – particularly in the blockchain sense spreads and duplicates the processing across computers in the ecosystem. It means built in redundancy and complexity.
But, this is not what people were sold. People were sold the idea that blockchain will revolutionize everything, and they are still being sold this idea. Moreover, they were and still are being sold the idea that blockchain is more efficient than traditional centralized computing. This is just a straight up fallacy. The hype surrounding cryptocurrency began to focus on blockchain rather than cryptocurrency as an end in itself. Cryptocurrency is the use case for blockchain as a technology. Cryptocurrency has proven blockchain as a useful technology – but only for one specific purpose: currency. That isn’t to say that blockchain technology couldn’t be used for other purposes, but it was not immediately apparent at the time that it could be more efficient than non-blockchain technology, and it is still not apparent that blockchain could be more efficient than centralized technologies.
Merely adding the word blockchain to a company’s name was enough to spike the company’s stock price. Companies were clamoring over each other to become part of the blockchain revolution. A tea company changed it’s name to include “blockchain”, and it is reported that their stock price surged 432%.
Enter the ICOs. ICO stands for Initial Coin Offering. This is essentially an exercise in hype where some company or individual markets an idea for a business or money making exercise, and then sells a small part of this venture in the form of a “token” for the first time. It’s very similar to crowd funding. A token is basically another word for a cryptocurrency, but it’s generally meant to represent a piece of value held in something other than the currency itself. Ethereum’s ecosystem provided fertile ground for tokens to be used for such a purpose. Tokens are kinds of “contracts” on the Ethereum network, or other blockchain networks. Ethereum easily allows people to create tokens which can then be traded on Cryptocurrency Exchanges at a later date.
In my opinion, this is where the whole thing went awry. Many ICOs were genuinely attempting to come up with disruptive business models that would help the cryptocurrency landscape to thrive and compete with other currencies. However, studies have shown that most were just scams. People bought in to the idea that they could own a slice of the blockchain revolution, and Ethereum was used and abused as a platform for swindling people in this way. People thought they were buying something like a share in a business. They were tricked in to believing that a token is something like a security, but the SEC declared that tokens are not securities. In other words, owning a token does not entitle you to a slice of the business that issued the token in the first place. I was asking “when is eBay going to accept Bitcoin?”, but many people were asking “when is the business whose token I bought going to start making a profit?”.
Unremarkably, most ICOs failed to achieve anything or make a profit. While I’m skeptical of technical analysis in markets, some analysis does point toward ICOs weighing down the overall cryptocurrency market. But, this is hardly the point. People were sold a lie. They were sold the idea that blockchain was something over and above cryptocurrency, that they could own a slice of this, and that the cryptocurrency bonanza was only going to increase. This was not the truth, and people and institutions have come to realize this. Cryptocurrency is just a payment system. It will be useful for challenging banks and institutions like PayPal at some point. But, this is going to take some time. In the meantime, developers like me are frantically buidling for the future and preparing the ecosystem for what’s to come.
It’s time to focus on the advantages of cryptocurrency over traditional currencies and payment systems. In a nutshell, cryptocurrency is worthwhile because it takes the power out of the hands of corporations to censor and cut off funding to various organizations, it lowers fees for international transactions, and it means that there are universally accepted currencies that can easily cross borders without intermediaries. This is why cryptocurrency is a good thing, and it is why we need to work toward a future where people’s expectations about it are corrected. The next time the money is poured in to the marketplace, it should be there because as a society we opt in to it as a payment method, not a get rich quick scheme.