Crypto is a Bubble, Bitcoin isn’t
For those of you who don’t know me (which is most of you), my name is Dhruv Shah a student at Bentley University. FOMO bought bitcoin. The skin in the game made me hungry to learn more, and that is exactly what I did. I am a crypto enthusiast like you and would love to hear comments, concerns, and compliments over @dhruvbs. Thanks!
Speculative markets have a history of producing similar end results. The Dutch tulip-mania ended sorely, and as did the dot com bubble. Don’t be quick to dismiss the past. Investors who believe the cryptocurrency market is any different than previous speculative bubbles are naive. The future of blockchain is incredibly bright, but the road ahead is foggy. Major questions and concerns still flood the market, yet assets are still seeing all-time highs. Cryptocurrencies have become the very definition of a speculative bubble by displaying decentralized ecosystems with no product or token value accrual mechanisms. 99% of currently listed tokens will not make it out of the bubble. Currently about 1600 coins listed on Coinmarketcap.com, this would leave an estimated 16 tokens. Here’s why:
1. Blockchains that are securities. Decentralization is the root of blockchains. The idea of cutting out the middle man appeals to those looking for sovereignty from the legacy financial system. Decentralization is at the core of why bitcoin exempt from being a security. The decentralized split of power amongst nodes within the Bitcoin ecosystem makes it impossible for it to be classified as a security. If the SEC was to pursuit a lawsuit, they would be unable to pin leaders or specific individuals responsible for the actions bitcoin. Unfortunately, this is not the case with many tokens as money hungry bastards flood the space. Preserving a decentralized ecosystem is the core to being exempt as a security. The Howey Test is a series of questions that if fulfilled, define an investment as a security. In 1946, SEC vs Howey laid the following elements to define a security:
a. A contract must require an investment of money
b. The investor invests with the expectation of profits from his investment
c. The investment is placed in a common enterprise
d. Any profit is derived from a promoter or third party
When we speak to the topic of decentralization we refute the fact of a common enterprise existing. A common enterprise is defined as an entity that “ to show that the investors are dependent upon the expertise or efforts of the investment promoter for their returns” (Borneman, Brigham Young University). A common enterprise implies that the profit should be a direct effort of the enterprise and the profit directly benefits the organizational shareholders. Once an enterprise accumulates profit, the shareholders are paid out accordingly. This is where element C becomes tricky for the SEC, especially with “non-profit foundations” that are issuing tokens. Often times the non-profit token foundation is holding a reserve for future R&D. If the token is gaining value, and the enterprise does not directly profit but holding a reserve, how do you define the token enterprise as a “common enterprise”?
Like those who have disregarded bitcoin and the tech behind blockchains, the SEC has a large learning curve ahead of themselves. This is why regulation has been slow to the space. The IRS claimed cryptocurrencies as property, the Commodity Futures Trading Commission claimed tokens as a commodity, while the SEC claimed a few of them as securities. There is clear confusion as to what these virtual currencies are. But the first step for the SEC begins with making sure there are no securities. I am more than likely not the first and not the last to tell you, that there are obvious securities dodging regulations by issuing coins instead of paper. How the SEC will go about coming down with the regulatory hammer is still unknown. It could be classifying cryptocurrencies as a new asset class and regulating it that route, or taking token foundations to court. Not being classified as a security is vital for all public blockchains. With being a security comes strict regulation, auditing, and mandatory public disclosures which most cryptocurrencies would not be able to provide due to the funky governance models of altcoins.
Most altcoins are obvious securities that have no business being tokenized. The reason for a company to issue a tokenized asset is to provide miners with a financial incentive and users a real economic use case for transacting with the token. In the case miners mine bitcoin because there is an obvious premium for them to exploit. Users of bitcoin use the token to transfer value exchange for goods or a service. Bitcoin is purposed to serve as a money. Most altcoins are building specialized environments to use the token. It is remarkably similar to buying a gift card to a specific store. This is intrinsically the problem for most altcoins. They serve such a specific purpose that there are very few use cases. Few use cases leads to minimal users in the ecosystem which gives the native asset (the token) little value.
Tokens like ripple question the very idea of “valuing accruing back to a token”. Ripple has been found to be unnecessary when using RippleNet ,and RippleNet has been proven to be 6% faster when banks do not use it when messaging (Ryan Selkis, 2018). As far as common enterprise goes, 60% of ripple is owned by RippleLabs. Centralization in the early stages of a token sometimes is necessary, but RippleLabs still holds an unbelievable amount of ripple and can dump their supply on the market.
To reiterate, whether a token is a security or not, a retail investor should always consider the factors of the Howey Test. Ethereum is another token that has come under scrutiny of late. However following the DAO scandal, the SEC claimed Ethereum was not a security and therefore I believe Ethereum will survive the security crackdown even though more than 12% is in the founder’s reserve (Yikes!).
2. Established companies creating blockchiains just for the sake of using “blockchain technology”. LL Bean, IBM, Samsung, and Kodak have all announced something related to blockchain whether it’s releasing a token or a patent. Kodak Eastman (KODK) is set to release KODAKcoin. It is a frenzy to get hands in the blockchain pot regardless of what the business model may be. Kodak’s publicly traded stock, which has been beat down for years, went from $3.10 to $10.70 in 2 days after the announcement of there soon to come cryptocurrency. It is the “retail investor effect”. Any product or service that effectively markets buzzwords or content related to blockchain is skyrocketing thanks to investors loving companies playing around with blockchain.
The type of money we are seeing thrown around nearly echoes what happened during the dot com bubble. Any company that had a .com at the end of their names or was a company even remotely related to the internet took off. Investors blindly threw money at speculative products and services that didn’t have proven track records. The infamous, Pets.com raised a cool 82 million prior to its IPO. Webvan.com, a service to deliver groceries, raised 300 million prior to its IPO and at its peak was valued at 1 billion dollars. The valuations and speculation nearly mirror each other. Anything with a “.com” in its name was headed towards the moon. It was hip. There is a similar vibe with blockchain. It’s the new fintech that you can’t miss out on. It has created a sense of urgency for investors that don’t understand the space; the FOMO is in full effect.
3. Blockchain scams still lurk. Bitconnect and Onecoin, just to name a few. Tron’s whitepaper is heavily plagiarized although the community is still thriving (for now). These scams will drive a negative sentiment into the market, which will lead to all alts, including the quality ones, to crash. People losing serious money on scams is unfortunately unavoidable. Prior to investing, understand what the token is attempting to achieve by reading the whitepaper. Then get a general gist of what the community is like. If well-known figures in the space are have been opposed to the token or have openly commented on the token being a scam, take the hint and don’t invest. And finally, don’t listen to your unestablished investor friends, always DYOR. If you are looking for a general step by step process Arjun Balaji proposes a great framework:
Back to the topic at hand, scams will prove detrimental to the culture that surrounds crypto. During a bull run everyone’s happy, tokens rip, including the scam tokens. But when more and more people are left holdings bags, especially in an unregulated market where the schemers will be able to run unscathed, people will be warded off from investing in cryptocurrencies as a whole. Bitconnect is the most well-known scam coin in all of crypto thanks to this guy:
Reading through Bit connect Reddit posts was so sad.
Ponzi schemes litter the market. With no regulatory expectations and irrevocable transactions, crypto has bred the perfect place for scams.
4. Thanks in part to the hard fork mania in early 2017 many use cases are duplicated with minor changes. For example, ZCash and ZClassic. The only difference between ZCash and ZClassic, is that ZClassic has no founder’s reward. The code is identical with a couple lines removed that were related to the founder‘s reserve. I highly doubt a regular user of ZCash would be so opposed to the founder fee that they would turn to ZClassic as a better alternative. Considering the ZCash founders reward eventually comes to an end, ZClassic serves no purpose. Over time stragglers on altcoins will transfer to greater volume networks, therefore reducing the need for smaller tokens with duplicated use cases like. Greater volume equates to more transactions on chain, which attracts more miners, hence increasing the safety of the token. Nic Carter, currently heading Fidelity’s Alternative Asset branch, stated “It’s difficult to imagine a world in which multiple similar virtual currencies can achieve widespread usage” (Nic Carter, 2016/2017). They may sound monopolized for the founders of tokens, but it actually allows for a majoritarian democratic process. Users will draw towards tokens that are liquid and offer safe, secure, and dependable networks. In the meantime, smaller tokens will be dwindled down until they are non-existent.
The founder of ZClassic is also the founder of Bitcoin Private ($BTCP), Rhett Creighton. It is obvious that Rhett is forking tokens for his own profit. It is very subtle and technical people don’t realize, but $BTCP incorporates the very founder’s fee that Rhett opposed when creating $ZCL. $BTCP was also created to pump Rhett’s bags. By announcing an airdrop of $BTCP to $ZCL and $BTC holders, Rhett pumped the price of $ZCL, their very own token. When $ZCL peaked, they dumped their bags on the market and went in on $BTCP. $ZCL had a cliff like drop off, while $BTCP took off, playing right into Rhett hands.
Rhett is one of many schemers in the space. The market is bloated with useless tokens, simply look at how many bitcoins there are (Bitcoin Private, Bitcoin Dark, Bitcoin Core, Bitcoin Cash, Bitcoin Diamond, Bitcoin Gold). There is no reason for this many point A to point B currencies to exist. My belief is that investors that were late either 1) don’t understand the difference between the bitcoin knock offs or 2) Believe they have found a needle in the haystack that no one else has noticed. Everyone has heard the story, “Well if you bought Amazon, Apple, or Ebay during the DotCom bubble you would have returned more than 100x.” Investors are scrambling across alts to find the next Amazon, but it is right in front of their eyes. Buy bitcoin and HODL if you have true conviction in blockchains.
However, do not take me as a poser against all forks. Hard forking may prove detrimental to the overall strength of a network, but it genuinely can solve an issue that may be perplexing to a community. That is the beauty of open-source software. It allows for anyone and everyone to build something they believe is better than the existing products offered. Take Bitcoin Cash for instance. The block size of bitcoin has been debated for years on end. A good chunk of community members believed the small block size of bitcoin would dampen the chances for bitcoin to scale as more and more transactions are needed to be verified. Bitcoin Cash solves a very legitimate dispute that the community was split on. Nonetheless, most forks of tokens should be taken with a grain of salt. Simplify the need for the fork, and challenge whether the token fixes an actual dilemma that the original token has/will fail to solve.
5. Not only do scams exist, but most blockchains have yet to even release a product, yet they are flush with capital. Investors have funded projects like Tezos to 200 million USD with no product release and no concrete roadmap, just a simple whitepaper explaining an attempt. Augur, a decentralized prediction market, an incredibly difficult script to write is regarded one of the most highly anticipated releases. They announced a Q1 release in 2018 but failed to meet it. Jack Peterson recently announced an exact release date, July 29th, but the question of whether the product will be ready in time is still in question as they have proven to have not met prior announced release dates. Although Augur is taking necessary steps to make sure the product software is well written, this should not take away from how long it has taken to release an actual product. Some tokens have been able to release shippable products but mainstream adoption still lacks. The most successful release we have really seen was the EOS testnet release, not even the mainnet, which sent their token into a moonshot. Token holders are hungry for real network releases. Without a network release tokens should be considered a speculative asset. Speculative assets with no network to prove the worth of tokens, combined with a mix of absent regulatory measures, is an ideal recipe for disaster.
The market is still in its infancy. This has caused all altcoin correlation to be 1. When bitcoin takes a dip, altcoins also fall into the red. This occurs due to the mindless investors that crowd the space. Every altcoin is a differently dressed up bet on blockchain, while bitcoin is a bet against the US dollar. Bitcoin maximalism has encompassed the space, but do not let this distract you from the fact that most money made trading is still in these shitcoins that retail investors eat up. Bitcoin is the only long term outlook in blockchain right now. Blockchain will eventually bring successful utilities and other use cases other than a store of value or medium of exchange. But for now, it is too early to hodl coins that have no intrinsic value or network to back it. We jump back and forth between different consensus protocols when we barely have time tested bitcoin and PoW. Naval has often states that it takes at least 10 years to build something meaningful. We have yet to meet this benchmark with bitcoin.
Sources:
http://money.cnn.com/galleries/2010/technology/1003/gallery.dot_com_busts/2.html
https://medium.com/the-zcoin-digest/zcoin-compared-to-zcash-4ad21d97636f
https://zcoin.io/zcoin-and-zcash/
https://consumer.findlaw.com/securities-law/what-is-the-howey-test.html
https://cointelegraph.com/news/unpacking-the-5-biggest-cryptocurrency-scams
https://blj.ucdavis.edu/archives/vol-5-no-2/why-the-common-enterprise-test.html
