I came late to the crypto space. Technically i got really involved mid 2017 but i tried to immerse myself deep in that space. I have gathered enough information to understand why Crypto is here to stay. I am very bullish on the long term trend and how decentralization will impact our every day digital and maybe non digital life. But i have also made observations that truly worry me in the short term. They stick with me like a shadow that does not leave you in the Sun.
They could all have significant impact in the short term life of the crypto innovation cycle. It is hard to say to which extent. So after my exercise of anticipating what could happen in 2018 here are the factors that worry me (And heads up, this post is *not* about “bubbles”).
1. Mass Superstition
There is a difference between believing in the future of something and being informed. Blindly buying into crypto (or dismissing it) is dangerous. The problem is that in the past months a huge fresh influx of people, usually misinformed, came to the crypto world. Some will call that greed, or speculation or simple a sheep-follow-sheep mania.
I actually do see that as a positive and necessary part of the education process. The problem is that when the majority of people owning crypto are not well informed enough, they won’t have the bullet proof jacket that is necessary to cope with “bad news” when they occur. This could, out of laziness, cause a panic movement that could accelerate an irreversible hard crash (i am not talking about the typical 30/40% correction).
2. The role of (ignorant) mainstream media
The business of media is to generate page views and sell ads. The flashier the headlines, the better. And mainstream media rarely covers news accurately. If you understand any topic well, and read in most newspapers how this same topic is covered, you’ll know what i am talking about. The impact mainstream media has on rallying a crowd or dismissing an industry is still enormous. The fundamental issue i see that by way of amplification through social networks, the information provided to make wise decisions is rarely there.
Add to that the Fake news factor: how many coins and tokens have already been affected by fake hoax or news provided in the networks.
I am truly worried we’re in majority exposed to information that is not good enough to sail in the seas of that industry. If there is one clear bubble right now, it’s the media bubble.
Social networks and App stores have to play a major role in building the trust layer that is necessary. Detecting early bad news, bad players, scams and more is going to be become critical. But are they equipped to do it?
3. Token owners / Token users ratio
I will say this, even if that makes a lot of entrepreneurs not happy: but the majority of people buying into ICOs do not care about your precious token, your mission or your protocols. They care about making a quick 10/100x. No one buys your token because they plan to use it. I doubt that those who bought Kin tokens are Kin users, or Zrx tokens owners plan to use them. Some may believe in your mission, but the “hodl factor” is in the low digits after your ICO is done.
We have billions of dollars invested in an asset class where the alignement between the token issuer (your startup), the token buyers (traders) and the token users is not straight. And the reason is obvious: most of those token are not usable or even available yet. Their only value in on an exchange order book.
What happens when your company fails to deliver, or is no longer the darling of the investment community? it will crash. Keeping a crowd of investors, motivated by high returns is going to be a tough challenge this year, especially if you don’t deliver.
4. Crypto Entrepreneurs Safety
Earlier this year, Vitalik Butterin visited Israel along with other personas of the industry. It was stunning to me to see how, those people who carry so much responsibility on their shoulders, walk free of worries. We live in a world where bad things happen. Where a few people have a high “perceived” impact on this new economy even though everything is decentralized. I wish no one any harm but i would worry about their safety as a priority because this could have serious “perceived” impact. If you doubt this impact, see what happened to the rate of ETH when a fake news on its founder got spread. Recently there was a kidnapping happened in Ukraine.
Without going so far, even the risk of being threatened if your crypto does not behave well is not something you want to live with. I may understand from that angle why someone like Charlie Lee, the founder of Litecoin preferred to sell all his coins and not be constantly mob-lynched on twitter or other networks
I also believe that everyone with a wallet in his pocket holding lots of “virtual money”, no matter how secure, can also be at risks. If your fiat wallet gets stolen, the loss is limited (call your Bank? visa?). But with crytpos.. you can lose a lot more…And wallets do not address this risk.
5. Government War
They will probably fail at “killing cryptos” but i do believe a major war lead by some governments feeling they could/lose control will hit crypto services, companies and the ICO value chain. It actually started. Hyper regulation could be one of the risks, outlawing some activities or making examples out of some companies. This will have a major impact on the health of the industry now focused on addressing this war instead of innovating. I do believe though this is a vain effort: governments have more to earn than to lose with crypto currencies
All the eyes are pointed to China and Korea where a huge part of the crypto economy is happening. China could take over or even ban the bitcoin mining activity, which would not be a good thing. Korea could shut down crypto exchanges which would have a very bad impact. Those risks are real
6. Organized Pump and Dump rings
One would be naive to believe the price of all coins and tokens is traded fairly. There is out there groups of investors colluding to artificially manipulate the price of some crypto assets.
I am not sure exactly how automated this is to date but this is not good and all exchanges warn users against those practices that are really hard to detect and the bigger the industry the higher the reward (with relatively low risks…)
7. Tax castration
The governments may not like the raise of crypto but they do like the idea of additional influx of revenus by taxing you. And crypto will not be an exception.
I hope our dear governments are not going to make this overly complicated because this could have an impact on how people are willing to take risks and adopt those new currencies. One thing that will make things a lot easier: the possibility to pay tax directly in crypto money. But if you have to report every single transaction, including the coffee you buy with you crypto visa card: good luck with that!
I am for taxing gains, but the rules and mechanics to report have to be simple enough.
8. Open vs Centralized Chains
The internal fights that we witnessed this year on Bitcoin is an example. Overall debate and difference of opinions is a good thing. It forces improvements. But when the governance of those involved in the development of an open source protocol is not working out well, it could mean its death. And if open can’t win, i anticipate that closed protocols may take over. But what would be the point then? Censorship-resistance and decentralization can work only with an open movement. There is no point in having high scale, high volume of transactions if the environment is closed or centralized. We’re back to ground zero.
I hope the developer community can overcome internal fight and not kill the soul of what gave birth to the blockchain movement.
9. Mining concentration power
It is becoming harder to mine cryptos. Harder and more expensive. Big companies like Bitmain and Bitfurry has leveraged that wave and a lot of the mining activity is no longer a side hobby but a true business activity lead by a few groups in the world. So yeah, you can argue Blockchains are decentralized but the mining activity seems to be. This is worrying because that could lead to extreme situations where the mining power is aimed at generating 51% attacks. Some say the raise of BCH vs Bitcoin has been possible because the mining power was concentrated, something that would have been very hard a few years ago. New coins and assets emerge and new blockchains with new mining protocols too. I would expect to see some Darwinism happening within each protocol and between protocols to clear that issue.
Thou shall not fear
I don’t mean to scare the readers here and i could have come with a more positive post for the 1st day of the year. But this is important to be aware of the risks when you invest in this particular space. Be bullish but highly pragmatic too. There is a price to be part of that industry, and it’s not the amount of money you’re going to pour in it. Navigating the space is incredibly hard. On-boarding this industry takes patience and extreme curiosity. There is no quick win. This is the price to pay.