The Deluded World of Crypto

There is nothing like a bear market to inject a dose of reality into the world of Crypto. With prices crashing and most assets having fallen by +70% — even our darling Bitcoin — it is a little easier to be objective about the market.

With the Lambos on hold and Crypto facing an identity crisis, the more opinions I read about the future, the more I ask myself: “Are you sure?”

What Problem Are You Solving?

With traditional tech startups, unless you have a track record of high-value IPOs and/or exits then you will struggle to raise money without:

  • A great idea
  • A great team
  • A working product

No successful VC pitch starts with a 50-page whitepaper. The process has evolved to a simple 10 slide pitch deck explaining the problem you are solving, how you will solve it, what it will cost and how you will make money.

The problem being solved is key. 
Without this you have no use case. 
Without a use case you won’t build traction.
Without traction you won’t build a profitable business.

If you can’t build a profitable business then why would a VC invest?

Even if you are successful at raising funds for your idea, your initial raise will be small, and you will be sharing a shitty apartment with your co-founders, working 24/7 and living on microwave meals.

If you manage to build some traction with your live product, you will need more capital to scale and with each round of financing you will dilute your position futher.

Only a small group of founders exit with life-changing money. Why? This shit is hard, therefore raising capital is hard. VCs know what they are doing, what might work, what probably won’t and what they are looking for in a team and an idea they can back. They have the capital and create the rules, usually in their favour and if you don’t like it, tough. For every Mark Zuckerberg, there are thousands, maybe more, who have tried and failed.

The rules of the game have changed with Crypto. Where a Venture round will come from a small number of large cheques, the token model allows for small fractional investments from a global liquidity pool of naive retail investors who lack the experience and objectivity of the Sand Hill Road.

We now have teams raising money with:

  • Crappy ideas
  • An unproven team
  • No product

To steal from Jimmy Song, they have sprinkled a little blockchain fairy dust on a successful centralised business model and are expecting success, yeah, because every idea needs a blockchain.

I’ll let you into a secret; they don’t, as John Wolpert wrote:

“The first rule of blockchain is that you probably don’t need blockchain.”

Tech startups need to feel the struggle; it creates the incentive model to work hard and build something the world needs. When teams are raising millions, 10’s of millions, even hundreds of millions based on a whitepaper, we lose the Darwinian effect of weeding out crap people building crap products.

Our Darling Bitcoin

There is no doubting the success of Bitcoin. It is pretty amazing that someone was able to create a network worth $billions, used globally, existing entirely on the Internet, outside of the control of governments.

Sounds like magic, magic Internet money.

Let’s be practical about it for a moment. How usable is a wildly volatile Bitcoin? Yeah, yeah 1 Bitcoin is worth 1 Bitcoin, sorry, this is a shitty and pointless argument in the real world. Most of us are living pay cheque to pay cheque, with little savings and a looming pension crisis. Every Pound, Yen or Dollar we invest in Bitcoin has an opportunity cost.

Whether you consider Bitcoin a Store of Value or a Medium of Exchange, unless it is going up in value it has little benefit to the majority of the world.
Don’t get me wrong, the problems that Bitcoin solves are important:

  1. Censorship resistance was great for Wikileaks when Mastercard blocked donations
  2. A Store of Value is great for Venezuelans living with hyper-inflation
  3. Trustless money would have been great for when the Cypriot government were stealing money from bank accounts (as long as the value was stable or going up)

The only problem Bitcoin solves for me is the need to make money; therefore it is no different from investing in stocks, commodities or any other market.

Yes I know, governments are evil: they print money, debase our savings and buy missiles to bomb weddings in the Middle East. Of course, this is bullshit, the libertarian ideals are right, but it is easy to be a vocal libertarian when you have $millions of Bitcoin, most of us are just trying to get through life, end our shitty work week and have the occasional holiday.

Moreover, as much as we might want to hate the traditional banking system (I do, I wrote about), it does work, though archaically: my pay cheque goes into my bank, my bills get paid, and I can access my money almost anywhere in the world.

Spending money with Bitcoin compared to this is much harder:

  • Option 1: open wallet, scan debit card and the amount is debited from my bank account
  • Option 2: swipe mobile phone and the money is debited from my bank account
  • Option 3: buy Bitcoin from an exchange and lose a little value in the conversion, find a retailer which accepts Bitcoin, send payment and wait any random number of hours for the transaction to confirm. Also, hope that before you spend it that the price hasn’t dropped 20%. Sure, 1 Bitcoin = 1 Bitcoin, but £1 = £1 in the shops and they don’t give a shit what happens to the price of Bitcoin.

Sure sure, Lightning Network is coming, fast and instant payments, yet this doesn’t solve the numerous other problems such as protecting your private keys from an army of hackers who want to steal your Crypto. If you are not a Libertarian and can’t trade, then a volatile Bitcoin has as much value as most forms of investment/gambling.

But you live in England Peter, what about the Africans? They don’t have a bank in their village; they are poor Peter, Bitcoin helps them have a bank and stops them from being poor.

No, it doesn’t!

Firstly the majority of the developing world lives on less than $2 a day, they are not going to switch their daily hustle for a Crypto wallet on a mobile phone, especially when that $2 suddenly becomes $1 because some whale dumps on Bitfinex.

Yes we need a global currency, but:

  • Unless it is going up in value it has no use to the Western World
  • Unless it is stable it is no use to the Developing World

But ‘The Tech’

There are some cool things in ‘the tech’. Sending payments globally with Crypto is a pleasure compared to waiting for the banks to update their ledgers, but they could solve this if they had the incentive.

Programmable money I hear you say, Ethereum smart contracts for the global financial system you tell me.

I give you Parity.

Sorry, but software bugs are never going away. Coders make mistakes, and they can’t foresee every eventuality. I guarantee you right now, large institutions are not going to risk trillions of dollars on an immutable database.

It.
Won’t.
Happen.

Where the average Joe is happy with a centralised bank, which refunds stolen money, global businesses prefer centralised systems and databased where bugs and problems can be centrally fixed. Relying on a teenage Russian genius to decide on whether or not our frozen funds should be released is not a viable option for the business world.

If you solve one problem by creating a more significant problem you haven’t solved anything.

Jimmy Song wrote about smart contracts recently. That is twice I have mentioned Jimmy, I like Jimmy, Jimmy is a realist:

Making a contract trustless means that we really can’t have any room for ambiguity.

This trustless execution makes the smart contract the judge, avoiding the need for a judiciary system.

It.
Won’t.

Life isn’t that simple.

I can guarantee if there is something found to be wrong in the agreement, then the judiciary system will be used to challenge it.

A smart contract is just a more efficient way of processing agreements, which is a cool idea when money is programmable, but this will only work with fiat pegged stable coins, where you have the benefit of Crypto money flow but the reliability of $1 equalling $1. Just ask those Crypto startups who raised $10m in Ethereum and now have less than $5m because the price crashed. They still have to pay their bills and staff in fiat but their runway is now much shorter.

The idealised concept does not meet the practical realities of running a business. I recommend you read the Jimmy article, he is much more knowledgable than me and explains it is far more eloquently.

Decentralised v Centralised

Finally, we need to get away from this nonsense concept of decentralising everything. The world is not about to switch over from a centralised architecture to a decentralised one, without strong economic arguments:

We don’t need a decentralised Uber.
We don’t need a decentralised Facebook.
We don’t need a decentralised Google.

Not everything needs to be decentralised, trustless and censorship resistant. These blockchains really aren’t efficient, and while the dream of cutting out bad actors is admirable, decentralised governance is another way of saying decision by committee. Committees are slow, arduous and compromise too much.

We need strong leaders and visionaries.

I‘m aware I am probably coming across as a moody shit right now but it isn’t all negative. I actually think there are plenty of opportunities with the tech. We just don’t need 10 different cryptocurrencies with 10 different consensus mechanisms, we don’t need 10 different protocols and we don’t need to decentralise every successful centralised idea.

Where the dot-com boom was built on a vision of ecommerce but the killer apps were search and social, the killer apps outside of Bitcoin have not been proven.

Over the next few years we will see a high failure rate with these projects, either the tech won’t scale, the projects won’t find traction or these unproven tokenised economies just don’t work.

Crypto won’t go away though, it will evolve based on where success is found, as Brock Pierce said, this is one big live split test. My recommendation is to follow the money, the clever money. Most likely it will be a where centralised applications and processes are built upon the decentralised innovations in Crypto:

  • A connected global liquidity pool
  • Middlemen inefficiencies
  • The relationship between digital assets and money

People have been attracted to Crypto because of the financial returns of a bull market, rather than the tech, the tech has been an afterthought for the majority of projects (though not all). The market crashing is a good thing, it puts the focus back on good ideas. Look at the current state of the ICO market, who is hitting their hard caps? Rekt retail investors don’t have the money and the experienced VCs are more cautious.

Raising Crypto capital will require better ideas from better teams with a sound economic plan.

I expect a proliferation of fiat pegged stable coins, which derisk the opportunity for investors. And for Bitcoin, it is no longer an experiment, it is proven and here to stay, whereas the many clones will likely face a slow fade. What it becomes and how the world uses it in 5, 10, 20 years is yet to be seen.