Were it not for the power of irrationality, cryptocurrencies would likely be an obscure asset class circling the extreme fringes of the financial world and anarchist chat rooms. But thanks to early adopters willing to gamble on the unknown and newcomers ignoring the risk of a market bubble, no conversation about the future of finance — and well, anything — is complete without mentioning cryptocurrencies and their underlying distributed ledger technologies (DLT), such as blockchain.
DLT and the human creative power driving Web 3.0 could radically transform economies and societies, provided there’s mass uptake. But the bubbles and bad behavior that feed on irrational behavior could undermine faith in DLT and crush its promise. Karma Insider Chris White, the CEO of ViableMkts, which provides strategic guidance for building financial market technology, had some thoughts on what’s been driving that dynamic. “What the market’s really looking for en masse holistically is how do we properly apply this technology in such a way that it can be additive to the growth process around the global economy.” He adds, “The mania, I would call it more of the irrationality, it's more of a testing phase. And you know what happens when you're testing something? Some people are going to get hurt. There are going to be some mistakes. But I think we're learning as we go.”
Breaking down institutional barriers is the essence of Distributed Ledger Technology. Much has been written about its potential for positive, disruptive applications, such as:
* Lowering financial transaction costs to lift people and even nations out of poverty.
* Spurring competition: By decoupling large networks from big players, DLT allows smaller players to integrate more easily into those networks.
Startups with arguably the greatest potential for disruptive impacts are developing DLT platforms that are infrastructural in nature and scope. Keep in mind that there are different kinds of DLT data structures that inform DLT platforms and that distributed applications are built on top of those platforms. The most popular DLT data structure is currently blockchain. Platforms built on blockchain include Bitcoin, Ethereum, Ripple, Stellar, and EOS. One of Ethereum’s most popular applications is CryptoKitties (collectible digital cats). Another notable DLT data structure is DAG - Directed Acyclic Graphs (the technology underlying IOTA’s Tangle)- which was designed to become the backbone of the Internet of Things. Also garnering buzz is Hashgraph and its platform Holochain.
The Perils of FOMO
For all that’s happening in the DLT space, its highest-profile creations are Bitcoin and other major blockchain-based cryptocurrencies, which have been less-than-stellar poster children for rational investing.
Bitcoin’s Yuletide mini bubble ‘n‘ pop saw prices peak December 17 at $20,089 only to plunge 22% by Christmas Eve. Bitcoin wasn’t the only cryptoasset to hit the stratosphere in 2017. Ethereum gained 9162% while Ripple gained 36,018%. But things have turned bearish since then. The market cap for the top three cryptoassets have fallen sharply since the start of 2018. At the end of August, Bitcoin was off by 66%, Ethereum by 81% and Ripple by 91%. Yet investors persist. The total market cap for all cryptocurrencies excluding unlisted ICOs was around $220 billion at that same time period.
Karma Insider Olivier Oullier is a neuroscientist, DJ, and President of EMOTIV, the maker of Brainwear®, which specializes in understanding the human brain using electroencephalography (EEG), chalks the behavior up to classic herd mentality. “There is a lot of herding, and in some cases one could say that this is a very usual behavior. You know there is a trend that is being set. It could have been clothing or it could have been a song. It's crypto. People want to jump on the bandwagon. There is the fear of missing out.”
FOMO is also a driving force behind ICOs, which allow startups to bypass rigorous and regulated systems of raising capital by issuing digital tokens in exchange for legal tender or cryptocurrencies. Sure, on the one hand, ICOs offer startups and small businesses a more frictionless outlet for raising funds.
That does not, or course, come without risks. ICOs are like penny-stock crowdfunding on steroids with a half-life to match. A recent study found ICO token holders receive an average return of 179%, but that fiat value has a two-to-three-month sell-by date. The same study showed less than half of startups are still in business 120 days after their ICO. 83% of ICOs that do not report capital and do not list on an exchange can be pronounced “deceased” after 120 days, according to researchers from the Boston College Carroll School of Management. DeadCoins.com listed 669 deceased coins at the time of writing, not including scams, hacks or parodies. The vast majority were startups focused on the financial sector.
Cleaning Up Crypto
Talk of regulating crypto is on the rise. But the devil, as always, is in the details. After all, blockchain and Bitcoin were designed to undermine the concentration of power in a few hands. If regulations are too anemic, fraudsters and bubbles could continue to sully the reputation of blockchain and other DLTs. But if the rules are too heavy-handed, it could choke innovation.
So far, governments have taken different views on what it is they wish to regulate in the DLT space. China has banned cryptocurrency trading, but it’s very enthusiastic about DLT powering its smart cities. In the US, Intercontinental Exchange is partnering with Microsoft to form a new open and regulated trading platform, Bakkt, with the “aim to build confidence in the asset class on a global scale.” The launch date is set for November, subject to Commodity Futures Trading Commission (CFTC) approval. At the end of the day, though, regulation is still a great unknown in most jurisdictions.
The Karma Factor
DLT could potentially lead humanity into Industry 4.0, the M2M economy, and a more prosperous, more equitable future, but only if the good actors have the power and will to weed out the bad.