Coming from blockchain technology and its use cases in various industries as diverse as manufacturing, energy, automotive, healthcare and finance, looking at the cryptocurrency market is quite interesting.
Whilst blockchain plays the role of a foundational technology when using it to simplify legacy database infrastructures and adding a lean ‘singleton-ish’ transactional layer to formerly stale and complex technology stacks, most participants in cryptocurrencies don’t seem to be interested at all in the technology behind the tokens. Here, the token’s currency aspects dominate, which isn’t necessarily a bad thing, but…
A brief look at the market shows a huge money influx especially in the last 6 months. About 830 different tokens represent a total market capitalization of just under $90B with the Top 10 currencies representing around 90%, or more than $80B, as of this writing. Six months ago, the total market value was about $15B.
In order to get a better understanding of this phenomenon, we started listening to crypto market’s participants. Since Twitter and Reddit are two major channels of choice, it’s quite easy to get a feeling for the market in a short time. Here is what we have learned so far:
If you come from the technology side of blockchain, you should put your expertise aside, unless you don’t want to go mad: in cryptocurrencies, blockchain does not matter at all – it’s the currency, stupid!
This aspect alone makes you think again: Bitcoin’s CPU-based PoW vs Ethereum’s RAM PoW? Who cares? Single-currency-purpose Monero vs financial settlement network Ripple? Cryptocurrencies, application-specific tokens or meta-protocols, mostly based on Bitcoin? Nothing’s easier than comparing “valuations” of contenders representing totally different asset categories or applications.
Then: valuations. What, exactly, does it mean when Ethereum “is worth” $19B? In its 2014 launch, the Ethereum foundation issued 72m ETH – after three years of mining there’s a total ETH supply of 92m, as of this writing. Mining means, there is a certain inflation built in the currency’s protocol. Is it priced in?
Ok, there are certain tokens, especially the application-specific ones, that could be modeled as economic entities rather than currencies. This allows us to use some of the valuation methods we apply to securities, such as well-established economic and cash-flow models used in equity research. However, investors should be aware that the market price of tokens can differ significantly from the underlying valuation models: a large component of price is speculative in nature and will probably decrease with time, as the ecosystem matures.
Next, there is a strikingly outspoken communications behavior in cryptoland. Many self-appointed crypto investors, crypto traders or, more generically, crypto experts (!), seem to possess some finite knowledge about individual tokens, the crypto market in general, and – which is no differentiator versus the stock markets – they know the future. In other words: the cryptocurrency market is dominated by the same group of traders and investors as any other financial market in its espective infancy. And, as a side note, some occasional Nonviolent Communication training for market participants wouldn’t do any harm.
Disconnect between asset and its value
Our most relevant learning? Blockchain lies at the heart of crypto tokens, but the cryptocurrency market is dominated by people and their strategies without any connection to blockchain technology. Cryptocurrencies are treated as random assets. From the financial market’s perspective, this should not be much of a surprise. However, this disconnect between the value of an asset and its application could lead to major distortions in the future. The very first of these, the fact that blockchain transactions become more expensive the more the asset price increases, are already visible and have significant impacts on the respective blockchains.
In Germany, there existed a segment of the stock market called ‘Neuer Markt’. From 1997 to 2003, the Neuer Markt created many success stories and many more bankruptcies. The originally 30, later 50, listed companies represented a total market capitalization of more than 200B EUR. And, today exactly, we saw the impact of a 1.6 minute sarcastic video presented by Monero developer Riccardo Spagni during the Monero meetup prior to Token Summit.
Evil to him who evil thinks.