In the last two days cryptocurrencies across the board have plummeted in value, with the total market cap of cryptocurrencies dropping down 66% since its surge in January. The surface reasons for the downfall are related to a number of major news items, including stricter Chinese regulations and bans, as well as upcoming discussions from regulatory bodies in the U.S., South Korea, and India. Beneath the surface however, there is a larger macro picture around cryptocurrency for which the crash is a double-edged sword.
Initial coin offerings, or ICOs, have transformed into more than just launching pads for cryptocurrencies, they have become the fastest, least regulated way to raise money for a new business. In fact, as stated in Fabric Venture and Token Market’s recent State of The Token Market report, $5.6 billion was raised via ICOs in 2017. Many of those new businesses have a service, network, product, or value that is not particularly related to cryptocurrency. On the other hand, many of those products do have value for existing markets and verticals, and many of them use the benefits of blockchain or shared ledger technology to offer a more decentralized, transparent solution. Using cryptocurrencies to raise money for those projects is not an intrinsic problem, a cryptocurrency can (and already has in many cases) act as a less regulated stock to represent the value of a company, service, or network. The problem arises when we start to consider the actual value of those companies, and subsequently wonder whether the speculative value of their cryptocurrency is in any way related to the value of their company.
In the traditional VC or IPO world, the value of a business is determined by a series of considerations and calculations tied into the actual metrics of that business. For example, if you were to own a shoe company, your value would be determined by the number of shoes you produce, the amount of people buying your shoes, the profit margin on each shoe, as well as the hype and growth trends of the overall shoe industry. In the ICO world, there is a massive gap between the speculative value of the cryptocurrencies and the actual usage of the services or networks those cryptocurrencies represent.
Let’s take Dentacoin as an example, which briefly surged in speculative value to a market cap of over $2.2 billion dollars. Dentacoin is meant to be used as a currency for the dental industry, and is not a bad concept; the problem, however, is that no one is actually using Dentacoin. While a handful of dentists may accept Dentacoin, they represent just a fraction of a fraction of a fraction of the millions of dentists and practices worldwide. If the value of Dentacoin grew in congruence with the number of practices accepting it and the number of patients using it, then its currency would be much more stable. In this scenario, Dentacoin would act more like a stock than as a highly volatile currency. Instead, the excitement around short-term gains on speculative currency drove the price through the roof and well beyond any expectation of actual usage within the next few years –ultimately resulting in a crash. Dentacoin’s market cap is currently around $319 million (as of 2/6/18) , a considerable drop from its once looming $2.2 billion valuation.
Dentacoin’s transformation highlights exactly why the crash over the last few days is actually a good thing. The speculative value of the hundreds of new cryptocurrencies related to an assumed utility is unsustainable and unrelated to actual business value or use. The trend needs to normalize until the cost of cryptocurrencies parallels the actual business value that those companies and networks produce. This does not mean that companies need to produce profits immediately; a long term assumption of value driving a higher speculative value is ok. This growth is similar to what we see with companies like Uber and Instagram, both of which have huge valuations based on usage, user-base, margin, and penetration, but do not generate profit anywhere near the scale of their market value.
We need the value of cryptocurrencies to apply similar formulas for valuation. Investors need to start taking a similar tactical approach to crypto companies and consider the long-term value of that company, and whether a cryptocurrency actually makes sense for that business.
In the case of networks like Ethereum, EOS, Storj, or Dispatch’s upcoming blockchain technology, cryptocurrency is an integral part of the interaction of players within that network. They are not just currencies, they are functioning units of how a network allows players to interact. On Dispatch, tokens enable players to exchange data, information, and services within decentralized applications. The value of tokens in any network should be related to the value generated on the platform, as well as the number of users and applications. Many of the ICOs launching today do not actually need a cryptocurrency to function, and investors must learn to distinguish between viable use-cases for cryptocurrency and emerging companies that are simply trying to ride the wave.
As more and more applications that benefit users in the real world migrate to blockchain to gain the benefits of shared ledger technology and trustless networks, those technologies will amass concrete value, rather than value that is purely speculative. If a network succeeds at doubling its user base then a sudden acceleration of its crypto value makes sense, as there is more actual utility. Right now, however, there is an explosion of crypto companies with zero users in many cases, which has created a bubble that actually needs to pop. Once the surge of crypto companies without concrete utilities bursts, networks like Dispatch, which are being built for actual usage (and are focusing on developer relationships in order to ensure actual utility) can become reliable platforms with stable currency values.
The potential downside of the crash is that public opinion around blockchain is very variable, and more restrictions on blockchain technology could hamper the abilities of the real companies out there to succeed. These new technologies are already struggling to rise above the sheer volume of bandwagon-jumpers and scam artists who are popping into the world of cryptocurrency and ICOs. Some of the blockchain technologies today will legitimately disrupt the world for the better, and improve the lives of millions of end-users, however, many of them will not.
The bursting of the crypto bubble will normalize and reduce the speculative craze, and hopefully result in more diligence on the parts of investors and regulators. Hopefully, an increase in scrutiny will not only reduce scams and frauds, but also allow actually viable, valuable technologies to succeed; after all, the development of blockchain as a whole should not be derailed just because there are some bad eggs in the bunch.
Over the next few weeks and months, we will see a lot of press relating to blockchain, with evangelists on both sides of the debate claiming that cryptocurrency is both the savior and the antichrist. Blockchain is neither. It is a new, incredible explosion of technologies with tons of value, which has upsides and downsides as any game-changing development does.
Despite the doomsday-sayers, the crash will normalize, and cryptocurrency will continue to have significant speculative value. As blockchain matures, the world needs to look beyond just the currencies and carefully consider the actual utility, usage, and growth of blockchain-based platforms.
In order to determine which of the emerging companies will become the blockchain giants of the future, investors must pay equal attention to both the technology, the growth potential of the network, and the real-world applications. If the technology makes sense and provides tangible value to users and businesses, it will succeed, and its currency value will eventually normalize and stabilize based on a balance of utility and calculated speculation. If it does not, then eventually the speculative value of those currencies will disappear into thin air.
Disclaimer: Ivan Goldensohn is a founder and current employee of Dispatch Labs, a Partner in The Blockchain Bureau Corporation, a cryptocurrency investor, and an advisor to multiple upcoming blockchain companies in stealth mode. This article is not intended as investment advice. The opinions of the author do not represent the official stance of his companies and partners.
This article is guest authored by Ivan Goldensohn, Chief Marketing Officer Dispatch Labs.