The past 18 months have been a time of extremes for blockchain businesses and crypto tokens. From the euphoria of late 2017 to the “crypto winter” of late 2018, the industry has ridden ups and downs that have left many outside observers wondering what to make of the space.
Is blockchain the solution to so many of the world’s problems, as promised so often as Bitcoin neared $20,000? Or was it simply a passing fad, another tulip bubble? The truth is, blockchain is a powerful new technology and tokens represent a new form of tradeable with utility that can empower users within an ecosystem. Nevertheless, a basic fact of business, missed or ignored by many during the past year and a half, remains unchanged: fundamentals are still key.
A Brief History of Cryptocurrency
First, I want to provide a little background on cryptocurrency, what it is, and what it can do. Cryptocurrencies came into existence when someone using the pseudonym Satoshi Nakamoto - whose true identity remains unknown - released a white paper outlining the methods for creating Bitcoin. Since the design was open-source, it was easy for others to take the concept and create new cryptocurrencies.
Fundamentally, cryptocurrency is a unit of exchange - a “token” - governed by an open-source rule set for the creation and trade of a limited number of these units. Many cryptocurrencies regulate the number of coins in circulation by generating them from people running cryptographic verification of the transactions on the network, also known as a proof-of-work system. Others launch with a set number of coins as a way to verify transactions between users, frequently linking the coin's value to a physical good.
Those seeking a decentralized currency as a way to protect their funds from seizure, loss, or theft, as well as a way to freely trade, drove early adoption. This encouraged more miners to create sprawling computer setups to verify transactions and produce coins. Over time, new coins have emerged with alternatives to the original proof-of-work method of generation, designed to address some of the problems that arose with the original coins. In 2017 and the first half of 2018, a huge number of these coins were created and marketed through Initial Coin Offerings (ICOs), raising over $6 billion last year alone. Now, with major drops in the value of the main cryptocurrencies, ICO activity has dropped dramatically and many tokens have become moribund, leading some cynics to question the viability of the asset class as a whole.
But Are They Here to Stay?
Skepticism is healthy, but those declaring the end of crypto have missed the point. Cryptocurrencies are relatively straightforward to create and definitively - it is not a question at this point - can be applied to solve real problems. And as long as entrepreneurs are able to identify uses for cryptocurrency tokens, tokens are likely to persist in the marketplace. Of course, not all tokens will succeed. Of the initial coin offerings that took place in 2017, over half had failed by the halfway point in 2018. But it is important to remember that in this respect the crypto space behaves like any traditional sector: forces of supply and demand determine which businesses and ideas survive and thrive, and which fail. This is an aspect of “creative destruction” and is to be expected, particularly in such a new asset class.
Good Business Fundamentals Are Still the Key
So what differentiates a token headed for success from one destined to go to zero? While luck and timing are a factor - as in all aspects of life - the key is business fundamentals. Can the team execute on its vision? Do they have a roadmap, strong advisors, and a path to revenue? Is the product solving a real problem? The answers to these questions - the underlying strength and competence of the business behind the token - are the best way to predict which crypto-assets succeed and which do not.
Cryptocurrency does indeed offer the world a new form of asset class. Tokens are a unit of exchange that can bestow, through technology, all kinds of attributes - from ownership in a company, to a share of revenue and profit, to privileges and responsibilities within an ecosystem. As the space matures, these uses will multiply and become more established. Cryptocurrency has the potential to transform the way business is done. But we must always remember that just because something is a cryptocurrency does not make it valuable. To evaluate the likelihood of success, it’s still best to stick to the fundamentals.