All my friends are asking me what’s going on with crypto. In response, I usually talk about how crypto can succeed. But today I’m changing it up. I’m going to tell you how it can fail.
I see three challenging scenarios for crypto.
- A tech failure. The technology doesn’t solve scaling, security and speed issues.
- A funding failure. Crypto firms run out of money. The fiat monetary value of their raises from last year shrinks to next to nothing. And their runway to commercialization is longer than expected. This a common miscalculation in the startup world, by the way.
- An adoption failure. Despite overcoming the above challenges, blockchain solutions see limited adoption rates.
There are other threats. Government crackdowns. Massive hacks. Overly restrictive regulatory regimes. But they are too unlikely or don’t pose existential threats.
When the Money Goes
These days, most people are worrying about a funding failure. I worry least about that.
The threat is very real and very serious. Just last week, a company called Sirin Labs – which raised $158 million last December at the time of its ICO and has raised a total of $255 million – said it may pivot from building a blockchain smartphone to selling software to phone manufacturers because it was in danger of running out of funds.
Money problems are forcing dozens of other companies to either abandon or drastically scale back their original plans.
The problem? Many ICOs raised their money using ethereum tokens. Ethereum has lost around 90% of its 2017 peak value. In Sirin Labs’ case, what used to amount to $255 million is now worth around $20 million.
That’s not ideal. But companies needing funds or almost running out is pretty typical in the startup world.
Founding teams that know they’re making progress and creating something of significant value find a way to continue. Or they convince investors that they’re worthy of fresh capital.
The weaker companies get culled from the pack. It’s very Darwinian. The process isn’t perfect, but for the most part, it works.
A Technology Still in Its Infancy
The other two problems are joined at the hip. If speed, security and scale are conquered, then there is no looming adoption question. A technology that can get rid of middlemen, offer huge savings and provide greater efficiency will be widely adopted.
The big question is, can crypto technology attain Visa-like speeds? Can it provide impregnable security? Can it serve hundreds of millions of users?
If you think it can, I have one word for you: patience. You’re dealing with a time frame that is measured in years. Think about what Amazon went through.
It began in the ’90s. Its price shot up during the dot-com boom, peaking in late 1999 at around $90 a share. In two years’ time, it fell to $6 a share – a more than 90% drop.
It took another six years for Amazon to exceed the previous high it achieved during those wildly exuberant dot-com years.
Of course, Amazon’s success wasn’t guaranteed. But if Amazon hadn’t figured out how to unleash the power of e-commerce, some other company would have. In China, it was Alibaba, JD.com and Tencent. In Japan, it was Rakuten. In India, Flipkart.
What This Means
When a technology is ready to take off, it doesn’t depend on one company or founder (sorry, Jeff and Elon) to realize its transformative potential.
The price of Amazon in 2001 did not foretell its future as a dominant, trailblazing, investor-enriching company that’s still going strong. The price of bitcoin today doesn’t feel good. But don’t believe for one moment it’s predicting the future.
There’s a kind of “fog of war” these days surrounding crypto’s halting, unsteady progress. Is it one step forward and two steps backward… or two steps forward and one step backward? Even for me, it can be hard to tell sometimes.
At the moment, questions persist about how fast and how far blockchain and crypto-related technology will develop. That’s to be expected.
Like a lot of investors, I need to see clear and unambiguous signs of progress. As crypto technology advances and clears a path from beta testing to wider use to significant adoption to hopefully massive adoption, the fog of war will lift and be replaced by “facts on the ground.”
I’m still open-minded and optimistic about crypto. I do see progress being made. The industry will have to hunker down and keep it going. Results will have to replace words.
“Show, don’t tell.” It’s a reasonable request.
Co-Founder, Early Investing