11 Feb 2020
Last September 2019, I tweeted a prematurely positive position on the overall cryptocurrency sector, with an end-of-year target of $750 Billion for the overall sector.
That tweet was loved and hated by an equal number of people, judging by the 362 comments received, despite an official 1K Likes, but what stuck with me is the fact that I was hammered for being very wrong in this prediction. However, to keep the record straight, it was more of a wish than a prediction.
That wish is driven by my strong beliefs that higher market capitalization as a whole is a good thing for this sector, for several reasons:
New pools of capital (from gains) become suddenly available to projects and startups, some of which had been gasping for air in the past two years, stuck in the doldrums of cryptowinter. This also makes capital a bit less discriminating at funding new projects. In early stages, the quality signals are more difficult to find, even to the most discerning and experienced early-stage professional investors. That is why these investors typically choose a portfolio approach to increase their chances that at least ⅓ of that portfolio bears enough fruit to generate sufficient returns to offset the potential write-offs and losses coming from the rest of portofolio. As a side note, individual investors are also well served to follow a similar strategy. It is not easy to precisely pick one or two investments by putting all your eggs in one basket. Unless you are very lucky, you need to spread your bets across several pockets of opportunities, even if it means lowering individual amounts on a per investment basis.
The psychology of markets is a known factor and reason for rising or falling stock prices in the public markets, as it pertains to the general mood of the majority of investors. Cryptocurrency markets are not different from that perspective. With a positive mood, more investors (or speculators) believe that prices will move higher in the future, and they enter the trading dynamics, which drives prices higher.
As prices start to go up in a significant manner, media coverage about this development starts to increase not just within the crypto media sector (which is a niche media segment), but it starts to spill over to the general and mainstream media which is a much larger piece of the attention pie.
The total market cap of cryptocurrencies is now flirting with the $300 Billion mark, and that’s another important psychological threshold. Once it crosses that barrier, it will be on its way to pass the most recent high of $371 Billion that was reached at the end of June. At $300 Billion+, that sector will begin to experience more broad media coverage, as it did previously when it reached the over 500 Billion mark. More general awareness about cryptocurrency and the blockchain are a good thing.
If you follow the logical path of the rolling ball effects, you land squarely in the lap of regulators who tend to be reactionists to market developments. As the cryptocurrency market size swells, regulators (especially in the US) will start to re-prioritize their actions, and many of them will start to move off their sitting ducks positions.
Today, during a Congressional hearing, Federal Reserve Chairman Jerome Powell acknowledged that Libra was an important development to the growth of digital currency. I sensed a streak of progressiveness, as Chairman Powell said “we support responsible innovation…” and followed by saying he believes that “the process for addressing these concerns should be a patient, careful one, and not a sprint to implementation.” Of course, Chairman Powell was taking a jab at the US Congress who seemed hyperactive on wanting to apply quick regulatory handcuffs to Libra. Today, Libra doesn’t figure yet in the total cryptocurrency market cap figures, but they are an important proxy for the development of regulation in this market, especially that the US Congress appears to be obsessed with regulating them one way or the other.
Here is a clip of the Q&A segment that covered cryptocurrency and Libra:
Overall, I’m encouraged that many positive and promising applications of cryptocurrency are entering a second phase of their evolution by building strongly on iterative learnings from the past 2-3 years.
One promising sector that is jolting out of the gate, is stablecoins. Whether government-backed or not, they bring the novelty of programmability to money, a feature that didn’t exist before because we never had truly native digital money. As Fred Wilson pointed out on his blog today, USDC is one such example, citing the Venmo analogy. But let’s take that concept even further.
Imagine that you can use cryptocurrency-based stablecoins to make large transfers much easier, and at the speed and convenience of blockchain transfers. Imagine a smart contract built into a financing round that automatically transfers respective funds in stablecoins when all signatures are in place. And if you take that vision one step further, imagine that we then have widespread stablecoin-to-stablecoin transfers with exchange rates, e.g. from USDC to Libra, or USDC to QCAD (a recently launched Canadian Dollar stablecoin), or any other combination.
I’d love to see the above scenarios play out in practice because all the pieces are already in place today.
There will not be one killer app for crypto or the blockchain, but there will be several of them. While there are undiscovered ones, many are advancing today in unisson, albeit with small market shares and usage numbers, which make them less visible to the naked eye, but with the passage of time, they will become gradually more noticeable.
Follow the rolling ball –> Higher prices, leading to mainstream headlines, leading to more projects being funded, leading to more positive psychology, leading to more regulatory certainty, and culminating in the solidification of a large global market of users, believers, and a solid infrastructure of services and capabilities to make it all happen at a significant scale.