A Sonata for Crypto Winter (Part 1)

The bulls are hijacking a long dreary winter and calling for spring. Will they succeed?

by Edmund Yong


“Spring is just round the corner!”

And the bulls expect prices to take off soon like the start of the hockey season. They are all suited up with spring in their steps. It feels strangely familiar, we have been here before.


Are the bulls running on fumes, their fundamentals sound?

Every so often, an analyst will forecast bitcoin to moon by this year end and instantly become news fodder. Time and again, it doesn’t come to pass. Then the forecasts get revised, the timeframe gets extended, and the media still laps it up. (Note to self: Bulls know how to bullshit.)

But beyond that, their logic does make sense. And it goes fashionably like this:

There are some $300 trillion (that’s a *t* with 12 zeros) worth of financial assets in the world. The entire crypto market is currently less than $300 billion, or a 0.1% drop in the capital ocean. With the institutional interest in crypto, even if a small portion is diversified in it as an alternative asset class, it will be enough to spur a massive rally in the months ahead. There is too much capital chasing after too few good options, and investors are willing to put up with high beta for high yields, in multiples of X. Furthermore, flight-to-quality in the late stage of an economic cycle could benefit crypto.

Then there is the organic growth of user adoption, which is quickly gathering pace all over the world. Survey after survey shows that more users than ever want to own their first bitcoin. Let’s assume the crypto penetration rate is currently 1% of the global population. Based on innovation theory, the next stage of diffusion will be to the cohort of early adopters (14%) followed by the early majority (34%) – a major tipping point. Even if 1% becomes 10% in the next year or so, this will be a ten X increase! And the timeframe for mass adoption of new consumerized tech is increasingly compressed.

So the long and short of it: This market happens to be a huuuuge greenfield! It also comes from a very low baseline where we stand, with plenty of headroom to grow.

And with recent market-friendly moves from Bakkt, Fidelity, VanEck and Vertex, we should all expect Christmas to come early. After all, prices crashed since December last year seemingly with no bottom in sight. Since then the “mother of all bubbles” has burst, ICOs have sobered up (and reversed), mining pools are launching IPOs, and exchanges are running tighter ships. Roubini can rest in peace, and leave the rest of us in peace.

Winter lasted a whole damn year, spring is overdue!

But…

Bulls can’t start the party because the elephant is still in the room.

Regulators can poop this party and they know it. They can be the biggest showstoppers, and we’re not even talking about ETF.

There is a growing consensus in the industry that laws are necessary for crypto to enter mainstream, to win over the critical mass. Regulators are not the enemy, they are the enablers. The industry is still far from where it wants to be and it could use some help, to break a long winter with spring. But why laws?  Didn’t crypto flourish without laws? Laws don’t just draw a line in the sand, they define white and black. It is also a step towards maturity, away from the shadows. The industry needs that.

More importantly, it has a lot to do with damage control.

  • Crypto has lost the public relations war. It is off to a bad start. Scams have hijacked the growth of crypto such that the first hurdle in a pitch nowadays is a misinformed public. We have to start by convincing mom-and-pops that just because this is a lawless market, not everyone in it are outlaws. That it is perfectly okay to ‘trust a trustless system with no trusted third parties’ (and say this with a straight face). There is just too much bad press out there which only laws can de-stigmatize.
  • Scams are still an overpowering distraction. Undeniably, the bad actors are still out there doing very well at what they do best. For every bull out there that cites Moore’s Law, there is a bear that can counter with Gresham’s Law. Tech growth can happen very quickly but the risk of “bad money driving out good money” is real – since anywhere from 20% (Wall Street Journal) to 81% are scams (Bloomberg/Satis). Expect regulators to over-react. It is a Damocles Sword, all it takes is one bad apple for the shutters to come down on everyone else.
  • Moral hazard is a recurrent theme. This is something the industry can’t quite shake off in the eyes of the public, not least from the above. The unregulated nature of crypto inadvertently attracts more flies than bees and tends to have an adverse targeting of dark money. This is compounded by scary security hacks, many of which are insider jobs, and the lack of any investor safeguards when shit happens. All this lends to a perception that these punks cannot self-govern even if they tried, ala Lord of the Flies.
  • Founding fathers see laws as a Faustian bargain. Crypto had its origins with the Cypherpunks and grew into a global subculture with playful lingo, fierce tribalism, and self-deprecating humor. So a narrative like this obviously doesn’t sit well: “Bitcoin started as a polemic against the financial order. It now seeks legitimacy from the powers that be.” It will have to give up its lawlessness and statelessness to gain legal recognition. It will exchange feral privacy with federated control so that consumers can feel protected. Internal resistance is natural, but bitcoin is 10 years older and a long way from Silk Road. It’s not a sell-out if it’s for the greater good (cough)! 
  • The anti-establishment shtick is not working. Pundits claimed that millennials will power up the crypto boom just like in the 80s (Fundstrat), but it is clear by now that they are not enough to drive this thing. The market needs the middle majority to come in, and they want to, without the millennial angst (Edelman). They are just curious for an alternative to the financial system, not a destructive one. Also, the “Crypto Valley will Occupy Wall Street” and “Unbank the Banked” pitch rings hollow when crypto startups are courting handouts from Wall Street. The technology is neutral, respect that.

The hope is that laws can straighten out crypto, but not in the ways you may think.

Read part two.

2018-11-06T09:39:42+00:00 November 5th, 2018|Article|

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