If you’re like most people, you heard about bitcoin and the blockchain technology that underpins it back in 2017. This is when the world’s first cryptocurrency went on its epic run into mainstream awareness and everyone, everywhere had a view on it.
The hysteria of a bull market is the perfect environment for word to spread like wildfire, but when things cool down attentions turn elsewhere. This is precisely what happened throughout 2018, when the price corrected by around 80%. As you can see below, google searches peaked at the same time as bitcoin hit its all-time high in December of 2017, then fell away all throughout the following year and beyond.
Even though blockchain has been out of the public eye of late, a great deal has been happening in the space. So before the next hype cycle catches you unprepared, we’ve put together a concise break-down of 4 key trends to keep firmly in mind as media attention begins to return to this intriguing new technology.
1. Institutions Are a Go
One of the main barriers to entry for institutional investors has historically been the problem of custody. Institutions that want exposure to crypto assets like bitcoin are not willing to trade crypto on retail exchanges, nor are they prepared to assume the risk of securely storing their own holdings. Without respectable custody solutions, their capital simply sits on the sidelines or goes into other assets.
In 2018 Fidelity Investments Inc., one of the largest asset management firms in the world with $2.46 trillion under management, launched a sister entity to handle institutional cryptocurrency custody and trading. The new crypto offering is due to go online this summer.
In that same year Intercontinental Exchange (ICE), the company that owns the New York Stock Exchange and a number of other financial and commodity markets in the US, Canada and Europe, announced Bakkt, an electronic exchange for digital assets due to launch in July. Bakkt will begin by offering 1-day physically settled bitcoin futures as well as an integrated custody service for institutional traders.
It’s sobering to consider just how much capital these two players alone can now legitimately bring into the space. Especially when you consider that the market cap of the entire crypto asset class, even after the recent rally, is still less than $350 billion.
2. Big Tech Wants In
This month Facebook announced Libra, its own digital currency to be backed by a consortium of companies including Visa, Mastercard, Paypal and many others. What this announcement did was signal to the world that these established firms are looking for ways to incorporate a technology that now poses a serious threat to their hegemony.
Yahoo now owns 40% of a Japanese cryptocurrency exchange. Google has recently taken on Chainlink as cloud partner.Amazon has been snapping up crypto-related domain names and filing crypto-related patents. Just like the financial institutions above, these large cap companies showed no interest in blockchain during the previous hype cycle, but are now investing serious resources in leveraging it to their own ends.
3. Gold 2.0?
It’s quite fitting that bitcoin was born during the last financial crisis. It was a reaction to centralized authorities controlling the money supply. It wanted to be sound, uncensorable, premissionless, digital money that could be exchanged peer-to-peer like cash. Evangelists pointed to its limited supply and deflationary nature as the antidote to central banks creating money out of thin air and pumping it back into their stock markets to create the illusion of growth. It was to be gold 2.0, a scarce store of value that can act as a safe haven when other assets can’t be trusted. A new digital commodity for a new digital age.
Back then though, Bitcoin was not understood or well-known enough to perform its role as an alternative asset for uncertain times. A decade later both the United States and Europe are below their inflation targets, are unable to raise interest rates and are contemplating a return to money printing.
This time around, everyone has at least heard about bitcoin and should the global economy so much as falter, it will be much easier for all kinds of capital to flee traditional markets and flood into crypto just as it has historically flooded into gold. In short, the cat is out of the bag, the idea of digital gold is here to stay.
4. 3.0 Protocols Coming of Age
Just as Bitcoin became the world’s first decentralised digital money in 2008, four years later Ethereum became the world’s first decentralised virtual computer. A kind of Bitcoin 2.0, threatening to do to just about every other industry what bitcoin was doing to value transfer. “Decentralize all the things” became the slogan of a new generation and Ethereum’s sizable community of open source developers set to work at building the base layer of a new decentralised Internet.
At the height of the 2017 boom, both bitcoin and Ethereum enthusiasts were in for a rude awakening. With the world now watching they were forced to concede that neither Bitcoin or Ethereum were ready for prime time. You see, the trouble with decentralization is that it’s pretty difficult to scale a system that by its nature requires every single participant to approve every single transaction. Fees skyrocketed, transactions sat pending in queues, back to the drawing board then.
Another drawback of decentralized systems in their present iteration is that they’re enormously wasteful in terms of energy consumption. Proof of Work is still the main way that high value public blockchains achieve consensus and this means thousands of people all over the world running costly number crunching hardware, all competing with each other to publish the next block. To put this into context, the Bitcoin network currently uses about the same amount of power as the country of Columbia.Ethereum, on the other hand, uses roughly the same amount of energy as Bolivia.
Since the last hype cycle, the 3.0 protocols that could solve scalability and energy efficiency have been developed and are now in various stages of being tested and deployed. These protocols promise to offer the same security and decentralization as Proof of Work does but for a fraction of the power consumption.
Ethereum itself is making its own transition to Proof of Stake, a type of consensus algorithm that does not require power hungry mining chips and has plans to shard its blockchain so as to drastically increase the number of transactions per second that it can process. Other players too, such as Tezos and Cardano have already launched Proof of Stake smart contract platforms and are working towards being fully up to scale within the next two years.
Technology adoption cycles and financial bubbles share a lot in common. Those who build things get in first. They are the innovators, they labor in obscurity long before anybody else cares. The innovators are followed by the early adopters. They may not possess the technical know-how, but they see the light before others and are the first to spread the word.
Then you have the early majority, this group lives closer to the mainstream but have their radar attuned to whispers from the fringes. When the time comes, this group lets the wider world know. After the early majority comes the late majority and finally, you have the laggards.
In financial markets the late majority and laggards are usually the ones who bet the farm just before the bubble bursts and lose everything. Their losses are partly the reason why everyone else loses interest after a crash and is reluctant to get back in when the cycle starts to repeat.
Throughout the winter, when no-one else is paying any attention, if the innovators and early adopters stay the course and keep building. If what they’re building is worthwhile and the broader socio-economic conditions are right, then the next time around when the hype train pulls back into the station, the very height of the previous peak tends to form the very bottom of the next one.
What with institutional investors, big tech companies and a host of grassroots innovation taking place in crypto, this new asset class looks like it might be ready for another run.