Like the dot-com bust of the early 2000’s, real companies will emerge through a crowded field of tulips.
The recent crypto crash this past February (and continuing into April) instills ripples of fresh fear, uncertainty, and doubt into 2018. Could it be an omen of bad things to come? However, the recent correction is arguably very good news for the space in need of consolidation. Let’s take into account the past 12 months; we have only seen parabolic growth in the prices of cryptocurrencies. This is fueled by a strong element of speculation not seen since 1999 or 1636, depending on whom you ask.
In a frothy market, these types of corrections are beneficial longer-term because they clear out speculators. During these episodes, companies without product-market fit will accelerate their burn rate and fail faster.
That said, there are many ICOs without a single tangible product, clear road map detailing implementation, or glaring technical flaws whose token market valuations remain sky-high for no sound reason. As we dive deeper into 2018, the list of long term legal liabilities and tax woes will start to catch up. As a whole, there is a positive secular trend in terms of overall market capitalization because more people are adopting blockchain technology and cryptocurrencies. Even with sharp corrections in excess of 60% from all-time highs, these events have happened before and do little to dampen the enthusiasm of most veterans in the blockchain space.
Possible outcomes for 2018 and beyond;
- Higher Prices for Bitcoin and Other Top Alts: Near the end of 2018 the entire cryptocurrency space may very well pass $1 Trillion dollars in total market capitalization. A more bearish scenario would require the market a couple years to consolidate, recover, and regain upward momentum. Watching Bitcoin drop back down to $5,000 – $6,000 before going back up to achieve new all time highs.
- Delisting of Many “Useless” Tokens on Exchanges: Exchanges have three likely options: A) delist “useless” non-utility tokens that do not carry out the function they claim, B) register with the SEC, or C) close their doors. This goes hand-in-hand with the SEC’s impending regulations. Exchanges are critical for providing liquidity in the markets. In an attempt to comply with these new regulations, exchanges will delist an increasing number of tokens, which lack a clear product or use-case. One such example is Metal’s delisting from Bittrex. This trend could continue with greater speed in the coming years. US exchanges that carry tokens that are deemed unregistered securities will find themselves in the SEC’s cross hairs. Registered investors should use a platform or entity registered with the SEC, such as a national securities exchange, alternative trading system (ATS), or broker-dealer. Companies that sold tokens that are deemed securities will likely be fined or worse.
- Higher Quality Entrepreneurs and Developers Go To Blockchain: Many are simply not convinced that blockchain technology has real uses but the tide is turning. Higher token prices mean more blockchain startups will make more highly competitive offers to developers vying for talent with the likes of Amazon, Google, Apple, and Facebook. Working on tokens and protocols will reshape the startup landscape in Silicon Valley and the rest of the world.
- The Shift Away from Ethereum to Other Platforms: More companies will realize the impractically expensive fees of Ethereum based protocols and consider alternatives. While building and deploying smart contracts on Ethereum’s Turing Complete platform gives a lot of room for expressivity, it comes at very high costs. Literally. Network congestion can make transferring data or executing smart contracts on Ethereum extremely expensive. Oftentimes the price of transferring data on Ethereum spikes well over $1.00 and growing network congestion makes this worse. If you were charged $1.00 or more every time you liked a comment on Facebook or shared a story on Snapchat, how long would you continuing using it? Scalability problems on Ethereum will push developers to consider building on other platforms like Stellar, NEO, and other DApp platforms.
- Central Banks Embrace Blockchain Technology: More government experimentation with blockchain will continue even in the presence of regulatory scrutiny. Central banks keen on reducing friction and lowering costs from antiquated processes will experiment with blockchain-based settlements. Blockchain integrations with central banks are on the horizon and will be a key development in 2018. As a result, foreign exchange markets and cross-border remittances will become more efficient and cheaper for people to use. These are the first steps towards a global cashless society.
- China’s Crypto-Prohibition Intensifies: When enough of the population wants something, it’s going to get what it wants. China is now implementing further restrictions on VPN providers to prevent capital outflows into ICOs, among other activities. The last thing they did was shutdown exchanges in the fall of last year. Ironically, these efforts only strengthen decentralization by encouraging P2P networks while diminishing centralized platforms like major exchanges
- The Rise of Decentralized Exchanges: Longer term, these efforts will also embolden the emergence of distributed technologies and decentralized exchanges like the Stellar Distributed Exchange and 0x Protocol.
- Declining ICO Success Rates: There will be many more ICOs that fail to hit hard caps or key product milestones. The few major ICOs that do occur will likely take the shape of long awaited reverse-ICOs (like Telegram, Overstock.com, Kodak, etc.) and attract the majority of capital in the pre-sale. Even though ICOs may hit their hard caps this will be done with higher prices for Bitcoin and Ethereum in 2018, so the total token raise will be much less when compared to past ICOs. A growing number of projects will also fail to deliver any tangible product that attains product market fit. The declining success rates will accelerate further because the SEC’s nebulous stance on ICOs finally comes to an end. Expect the SEC to introduce concrete guidelines and regulations for the space in 2018. In an effort to protect the influx of Main Street investors from fraud and market manipulation, most ICOs will be subject to the SEC’s guidelines because they have no product. The existential risk of freezing or shutting down exchanges exist. With this trend we will also see mainstream investor enthusiasm die down significantly.
- Taxes and Anti-Money Laundering Laws Will Be a Bigger Issue than Security Laws: The biggest elephant in the room is not the SEC; it’s the IRS and FinCEN. Accumulated tax liabilities will apply to ICOs past, present, and future and all US entities in the space. A few years ago the IRS deemed some cryptocurrencies to be property, which means every time crypto is used for sale or exchange it’s potentially a taxable event. The IRS has launched a John-Doe summons of Coinbase so now every transaction of $20,000 or more has to be reported. Beyond that, FinCEN recently said that companies selling tokens are money transmitters and must comply with relevant KYC/AML laws. Note, FinCEN fined Ripple years ago for operating an unlicensed money services business.
- Intense Promoter Scrutiny: This is less a prediction and more of a call to action. There are emerging self-proclaimed “YouTube experts” in the crypto space evangelizing high expectations of ROI for projects that they have undisclosed special private deals. This creates an environment where influencers can potentially harm Main Street investors with unqualified investment advice and/or manipulate markets with “pump and dump” schemes. Expect the Federal Trade Commission and other consumer protection agencies to take action against such promoters.
Many recent token projects have failed to hit their sales or fundraising goals. Spectacular crashes like BitConnect will become all too common. The landscape of market cap dominance will continue to shift away from Bitcoin. These trends will only strengthen in the years to come, especially as the SEC,IRS, FinCEN, and FTC come knocking at the door.
This year paves the way for greater due diligence in the space – both from community self-governance and regulators – perhaps just in time before the next wave of speculative fervour sets in. Ultimately, all of these predictions are needed to weed out “blockchain” companies and tokens that have no use. Like the dot-com bust of the early 2000’s, real companies – like Amazon, Google, eBay, or PayPal – will emerge through a crowded field of tulips.
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