A new era is on the horizon for digital assets, or rather, the digital assets that can survive the ongoing downturn in the market. The speculative era is inching to an end. Recent events that have had a domino effect on the broader market for digital assets—such as Terras UST losing its peg to the dollar, Celsius becoming insolvent, and the popular venture capital firm Three Arrows Capital blowing up—are forcing legislators to take action to protect consumers and mitigate the chance of events like that happening again in the future.
What comes next?
Regulation and law enforcement are impending, especially now that a significant number of consumers and retail investors experienced losses due to digital currency apps and services that had high-risk business models without any safeguards or consumer protection in place.
When we see laws being created and enforced, we will most likely see digital currency platforms go out of business, and the prices of digital assets continue to fall in the short term. Companies that go extinct and the coins/tokens that fall to prices that they have no chance of rebounding from are necessary for the market as a whole to recover. As many bad actors as possible need to be eliminated from the space, by way of self-destruction (flawed business models or economic design) or law enforcement, before the blockchain and digital asset industry can be taken seriously by a majority of legacy players in the banking, finance, and business world.
Business, consumer, and investor approaches.
Consumers, businesses, and investors are arguably the majority of people that spend time, energy, and money in the blockchain and digital asset industry. For each of these groups, the recipe for success in the industry has changed. Businesses can no longer create non-sensical business models that rely on coin/token purchases to fuel them, and consumers and investors are no longer interested in supporting the vaporware that businesses have promised will be delivered shortly after coin/tokens sales come to an end—this is bad news for most DeFi projects and NFTs.
Many coins, tokens, and NFTs are thriving thanks to the greater fool theory. Individuals buying the coin/token/or NFT after an initial group bought it ends up increasing the price of the coin/token/or NFT. It provides exit liquidity for early investors while inciting a network effect that leads to many people believing that if they do not buy-in, then they will be missing out on an opportunity to get wealthy—this just adds more fuel to the fire and keeps the hype cycle around a coin, token, or NFT going in a way that increases its price and the size of its community.
Moving forward, digital asset businesses and digital currency companies will need to make it very clear how the money that enters their ecosystems ultimately creates outputs that the world objectively values, demands, and pays for.
In other words, businesses will need to be product-first-companies, where they identify real-world problems, create a solution to that problem in which the blockchain is a crucial component in facilitating the solution, and then sell or license that solution to consumers, businesses, or governments.
What if I’m wrong?
I believe that the scenarios I described above—the creation and enforcement of regulation, a significant chunk of digital currency businesses being forced out of the market one way or another, and the advent of more product-first companies—are very likely to happen.
But if I’m wrong, I think one of the factors below will be why
Too big to fail: Maybe one of the digital currency companies that play a crucial role in fueling the Greater Fool Theory really is too big to fail. It feels like everyone knows Tether’s business operations, especially its reserves, aren’t truthful and carry a lot of risks. It feels like everyone knows that most of the coins and tokens that Binance and Coinbase (NASDAQ: COIN) lists are pure junk with zero utility that consumers and retail investors aren’t interested in.
Regardless, all of these companies continue operating as if the problems that everyone knows that they have aren’t problems. I believe that these businesses have such a high degree of confidence in the idea that they can avoid the government crackdown or settle with law enforcement officials; that the risk of these too big to fail companies blowing up isn’t as probable as most people would like to believe that it is.
Even if the risk is as high as many people believe it is, I think that the too big to fail entities are so intertwined with the traditional financial system. Keeping the Bitcoin markets propped up, and even lawmakers, that some big player(s) would try to step in and save them from destruction if things began to go south for the big businesses with questionable practices.
A new Ponzi scheme is invented: Legislators and lawmakers tend to be slow-moving; it could be the case that a new digital currency Ponzi scheme is invented while they are creating regulations. In just five years, we have gone from ICOs to IDOs, to DeFi coins and tokens, to NFTs, and each of these concepts was pretty much the former Ponzi scheme with a twist. Those who create vaporware are very creative, and I don’t expect them to stop being creative during this bear market. If a new money-grab, get rich overnight, “everyone is making money except for me” concept hits the market before lawmakers can create and enforce the regulation. There’s a good chance we enter into another number-go-up cycle where even more bad actors are created, and the era where blockchain is mass adopted in technology stacks to increase efficiencies and optimize business processes gets delayed because of it.
Closing thoughts: short-term number-go-down
Regardless of whether my theories are right or wrong, I think it will take much longer than most people anticipate for the overall sentiment around digital assets to recover. I do believe that there are some exceptions to that idea, or rather protocols like BSV that are in the lead in the race to be regulatory compliant and create real value in the world. Still, unfortunately, digital currencies have left a bad mark on the reputation of these legitimate solutions. Although digital currency is distinct from digital assets with a utility like BSV, they are unfortunately lumped together in the greater conversation about blockchain, digital assets, stablecoins, CBDCs, etc.
Blockchain-based efforts that optimize business operations by a significant margin will be successful on a long enough time horizon. Many big companies will most likely begin acquiring the Bitcoin companies that have created solutions of this nature. It will be more efficient for the big companies to acquire, implement, and upgrade an existing solution instead of creating the solution from scratch, in-house, which would require them to gather all of the resources and talent necessary to get it off the ground.
My final message in this article will be that there is more pain ahead in the short term. I expect the market to decline more, sentiment around blockchain, digital assets, and web3 to get worse, and individuals to lose interest in anything related or adjacent to “crypto.” It doesn’t really matter how good your protocol is if the overall macro environment for your industry has a negative skew. At the end of the day, it is about markets, not individual stocks; and any market that is considered to be high risk will face sell pressure as the world’s inhabitants make moves to protect themselves from the ongoing recession that is bound to get worse.
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