Cryptocurrency startups have raised billions of dollars in the past 18 months to develop software companies to rewrite the rules, whether it’s the rules of voting or rules of stock trading.
Yet, many cryptocurrency advocates think that most of the projects will fail.
According to Yoni Assia, CEO of eToro, 95% of the cryptocurrency is expected to end up as nothing since that goes to startup funding.
Assia’s comments mirrored that of Joseph Lubin, co-founder of Ethereum, who compared the crypto boom to that of the dotcom bubble in the late 1990s, which ended in a remarkable bust during early 2000.
Lubin further added during a press conference in Dublin that if you’re going to look at the boom of dotcom and bust, there were plenty of similar issues back then. A lot of money was invested, a lot was lost, and numerous projects ended up as a failure.
Dominik Schiener, the creator of the IOTA cryptocurrency, told BI that he expects only less than 10 of the more than 1,400 crypto projects to survive. Furthermore, Danny Masters, who used to be a trader of JPMorgan and is now a crypto investor, on the other hand, thinks that only 5% of the projects are actually worth backing.
All four personalities mentioned are far from crypto-skeptics. They believe that the projects that will survive will transform the world and will make huge profits for those who have decided to back them up.
A huge amount of money was invested in new cryptocurrency startups in the last 18 months, mainly through the so-called ICO or Initial Coin Offerings. This is how a startup issues its own cryptocurrency and structures in the same way as Bitcoin, in exchange for money that they can use to fund the project.
More than $9 billion has been raised through ICO in 2018. This data comes from the consultancy company Autonomous NEXT.
Yoni Assia further added, “We’ve got something we never had before, not even in the dotcom bubble. If you’ve got an incredible idea and you create a whitepaper on it, suddenly you will have 100,000 millionaires reading it and agree that it’s a truly good idea.” If 1,000 of these millionaires will put in $10,000, which isn’t a lot of money for all these 100,000 millionaires, you will end up raising $10 million for your ICO. This hasn’t happened before.
Just like any investment, there are always risks. In the case of an ICO, it’s a higher risk though. This sector is still largely unregulated and is dealing with a lot of frauds. Eventually, a lot of these projects are most likely to fail, just like most of the VC-funded startup companies.
Nevertheless, crypto enthusiasts are expecting the companies that will survive to generate huge amounts of money, thanks to the transformative potential of the blockchain, the technology which underpins the cryptocurrencies.
Obi Nwosu, CEO of Coinfloor, a Bitcoin Exchange, thinks that in only 15 years, 1 of the 10 or 1 of the 20 may survive and we are looking at dozens of potentially incredible apps.
Crypto bulls believe that the blockchain technology, a public and immutable ledger that can be possibly edited through multiple and permissible parties, has the potential to recreate everything by providing the promise of having programmable assets.
Just imagine if your pound coin or your stock certificate would be able to automatically transfer itself to another owner as soon as the counterparty in a contract completes its side of the bargain. Or just think of your medical records that could be stored in a public database and will travel across borders with you just like a passport would. These are the kind of projects that are floated by those who are advocates of the blockchain technology.
Lubin has earlier said, “The technology is very profound, and it’s going to create a lot of amazing things for social, economic and political systems all over the world.”
According to Assia, “Investing in crypto today is as good as investing in the Internet ten years ago.” He further suggests that blockchain could be as transformative as the Internet.
Lubin had a similar analogy with MoneyConf and compared the cryptocurrency boom with the “creative destruction” of the dotcom bubble. Although a lot of projects failed, they have helped to pave the way for successful Internet businesses that came after. Others, including Google and Amazon, also took part in the boom and bust of the dotcom.
These successes would have been difficult to predict in 2000. Who would have predicted that a search engine would end up pioneering a self-driving car and explore new aspects of medicine? Similarly, the exact topography of the crypto failure is difficult to pinpoint, but it’s mainly the direction of travel that really matters.
How is the Crypto Bubble Different from the Dotcom Bubble?
There are plenty of major news outlets these days that are scaring newbie crypto investors away since they are claiming that all cryptocurrencies are a bubble that could soon burst, and investors will end up losing all their money.
This is truly unfortunate since they end up scaring a lot of potential investors that may miss out on the opportunity to make huge gains. Luckily, the increasing media coverage has captured the attention of some newcomers and institutions, which has led to the increase in the market cap. There are certainly two sides to the coin when it comes to this.
What Happened During the Dotcom Era?
So, let’s compare and contrast the Dotcom bubble with today’s crypto market and see if we can figure this out.
During the Dotcom era, a lot of financial experts were screaming loudly regarding the various companies that the “everyday Joes” was investing in lately were overinflated with little to no justification on the price of the stocks since the business had no tangible assets and no sustainable sales revenue.
This is strangely similar to the crypto businesses nowadays that don’t have any real assets and have no workable businesses model during the time of the ICO or initial coin offering.
Major Differences Between Dotcom and Crypto Environments
- Experienced investors are tutoring newbies
A saving grace is that plenty of those who are investing in crypto and have invested in the Dotcom era have chosen to apply the lessons they learned in the past now. These experiences have become invaluable to both veteran and newbie investors who have chosen to listen to investors who are far more experienced in this field.
- Founders seem more private
Most owners and founders of Dotcom businesses used investor funds to buy private jets and throw lavish parties instead of focusing on creating new business models. An article was recently released that talks about the co-founders of Razorfish, Jeff Dachis, and Craig Kanarick, throwing parties with some drag queens, while Ernst Malmsten, founder of Boo.com, was quoted as saying that his luxury jet is just “too cramped.” Soon after, the company of Malmsten went bankrupt after only 18 months and $135 million in venture capital.
It’s not known now who really owns some of these cryptocurrency businesses, so we don’t know what they are really doing with the money they have. Nevertheless, the crypto leaders that we do know about seem to be using most of their money to build businesses or to promote the businesses that they have successfully started.
- Fewer college dropouts now
Many business schools lost plenty of promising students who dropped out of school to establish their startup businesses during the dotcom era. Nowadays, there aren’t many college dropouts that have chosen to pursue careers in the cryptocurrency startups. However, it’s still too early in the crypto space, so this could potentially change very soon.
- Less full-time traders
I’m a full-time trader and have been doing it for quite some time now. However, in my own defense, I receive residual income and royalties from other businesses, so I don’t just rely mainly on crypto. However, during the dotcom era right before the burst, many people were quitting their full-time jobs to pursue stock trading.
Not many people have decided to quit their jobs yet to trade crypto full time. There may be some but not a lot. Most of those I’ve met in the crypto industry learned the hard way from their mistakes during the dotcom era and had no intention of quitting their job to pursue crypto fulltime. If they are going to make money trading in crypto, then it will make just some extra income.
- Not started with institutional money this time
The dotcom era started with a good amount of money coming from venture capitalists and some accredited investors who had plenty of money in their coffers. On the other hand, cryptocurrency is the exact opposite. Huge institutions are now starting to show interest in crypto and are thinking of pouring huge money into the market. However, the early adopters are the ones that have helped grow the cryptocurrency market to what it is now and is a total opposite of the dotcom era.
- Crypto is worldwide
Unlike crypto, the dotcom business wasn’t really worldwide. A lot of the companies involved were headquartered in the US, and most of the stocks were being sold in the US as well. On the other hand, crypto is not yet widely adopted worldwide, though it has plenty of followers and adapters from various countries all over the world.
- Much less money in the game right now
During the burst of the dotcom bubble, there was approximately $3 trillion on the market. Currently, the crypto market has a $200 billion market cap we haven’t seen the top just yet.
There are plenty of people who are speculating that cryptocurrency is going to be the latest financial bubble that will devastate the financial market, but there are also those who believe that cryptocurrency is going to be the next tech revolution since the beginning of the Internet and it’s going to change the way the people do business and send money.
What Will Happen if the Crypto Bubble Bursts?
This is the big question that’s on everyone’s minds lately.
It’s possible that the bubble could burst, and it may burst soon. Anyone who says otherwise doesn’t really understand anything about the financial market. You’ll inevitably have bear markets and bull markets. It could happen soon, or it may be after several years. No one can really make an accurate prediction.
However, if the bubble does burst, we’re seeing any of these three things happening:
- The junk coins could fall away and will not likely recover since they have no business model to back them up and there’s not much to sustain. The bigger and the more established coins could lose a good portion of their value and could take a longer time to recover although they could come back stronger than before and with a more powerful business model.
- This isn’t a bubble, and the cryptocurrencies will keep gaining value until forever.
- The cryptocurrency market will crash and burn just like the dotcom, and with hardly any of the coin, companies left surviving. We are not really seeing this option happening since fiat currency isn’t sustainable for the long term, especially since there’s nothing backing it up unlike the governments’ opinion on the print paper that we currently use. We need another option going forward, and we believe that cryptocurrency is just the right solution. Also, banks and some large monopolies that charge higher fees will take a longer time to transfer money. Who actually has time for that?