The Dark Side of CryptoCurrency Adoption 🐱👤
Let’s kick this adventure off in the land before Bitcoin.
As a whole, adoption has been the single key factor allowing the world to develop all the further and for ideas to spread. Adoption indicates globalization. And what does globalization tend to indicate? An inseparable permanent role (or critical short term role) of an idea from society.
Adoption is commonly closely correlated with value. The more valuable something is, the more likely it is to heavily adopted. Think about Google. The more people adopt Google as a search engine, the more “valuable” Google becomes.
Here we refer to value as something of high social value. Represented in its meta-physic counterpart: Monetary Value.
If 100,000,000 average people use Google, then it is theoretically extracting its value based on how much service it is capable of providing to those people. Obviously, the more people that resort to using Google, the more value Google would be capable of providing (and visa-versa). It is somewhat of a recurring feedback mechanism.
Now, let’s dig deeper under the economic hood and ask: is Adoption always a good thing?
This is the question, which begins to unveil the subtle structs of economic game theory and shines some light on the true nature of a projects viability…
But enough about adoption and its abstract role in recent history… Time to talk life post-Public Blockchain.
Circa January 3, 2009
Bitcoin is born and the race for global adoption begins.
*While there is a difference between Decentralized and Distributed systems; In this passage we will be using Distributed and Decentralized interchangeably.
Because Bitcoin is built on a network structure it becomes classified as something known as a DLT — Distributed Ledger Technology; And the nature of a DLT within and of itself stipulates is existence solely on Adoption.
When Bitcoin was just starting up, its overarching goal was to bring in as many users as possible — because adoption means demand & demand ultimately means value creation.
As the years trudged on and Bitcoin slowly started getting remotely adopted around the world, it began growing. Not just in the monetary value sense (although it’s hard not to notice gains like that) but in the social value sense. It began to seep its way into our everyday lives, and, what’s more, is it began to find a role for itself to play!
Piggybacking off of the raw economic opportunity presented by Bitcoin, multitudes of crypto projects appeared. Each trying to finesse their own supply vs. demand metrics.
The vast majority of these up and coming BaaS “Blockchain-as-a-Service/Business” Companies incorporated into their economic models was “value satisfaction” in their native tokens. Or, otherwise stated — you can pay for use of service in the companies native token.
Buckle up, we are about to simulate the soundness of some crypto economic theories by creating our own:
- CryptoProject name: VivaLaBitcoin (VLBTC)🤣
- Token supply: 100,000,000
- Tokens sold: 90,000,000
- Price of Token: $0.1
- Market Cap / Ecosystems value: $10,000,000
- Service provided: premium bitcoin mining pool
Say now, the project is fully developed and there is no intention of internal sabotage; Actually, it even received an anonymous angel donation for its ecosystem in the size of $100,000.
A user wants to start mining Bitcoin using the VLBTC services. He hops onto their site and looks for a mining plan to start. He finds a plan he is happy with and goes to pay for it and sees the following options:
Seeing the financial benefit of paying in the platforms native currency (VLBTC), the user hops on over to some DEX or a wallet that is capable of atomic swaps and gets some VLBTC. Goes and pays for his service and that’s that. Right? Users gets his services, Company gets its profits and the world keeps spinning like nothing is wrong.
What happens to the VLBTC economy? What happens to the early adopters, holders, and supports of the native coin/token?
Well from launch, the Projects team holds roughly 10% of the tokens. For the team to extract maximum value from those reserved tokens, they would need to drive some form of demand onto the open market. The open market is where the remaining 90% of the tokens would battle for identifying the (speculative) value of a project.
Let’s also mention that VLBTC as a legal entity operating from wherever the businesses existence does not depend on the tokens existence. As a service providing business, (given the service is a long term viable and valuable) their existence is solely based on the amount of actual business they get. VLBTC does not care what option you choose to pay in. For them to render their service to you (including taxes & operations) costs them $600. The pricing models are updated every 30 seconds using a live Oracle (←Auger plug?) feed and will always remain above $1,990 for USD/BTC/ETH and above $,1890 for the VLBTC price feed.
What happens to the price of the VLBTC token through this all?
Post-fundraising, 50% of the distributed tokens immediately got “redeemed” and keeping in mind that the value of the token at the time of trade in is $0.1; That means VivaLaBitcoin now has 45,000,000 VLBTC Tokens/ $4.5 million on hand.
The total cost of rendering the services will cost VivaLaBitcoin $1.37 million.
So what does VivaLaBitcoin do?
Dump tokens onto the open market.
Being that the atom thick order-books on the open market are able to absorb no more than 2,000,000 (collectively) before sending VLBTC token spiraling into an abyss of “price discovery”.
Accounting for VLBTC needing $1.37million, after they would dump 2,000,000 onto the market it would leave another $1,170,000 or 11,700,000 Tokens.
That translates to $200,000 of downward price action being absorbed at $0.1 before a cliffhanger in price… What comes after might look something like this in an order book:
Ultimately resulting in sharp price declines; accompanied by, more sharp price declines.
VLBTC is listed on 3 exchanges. Each exchange has the next 100 pages of the order book listed: each price point 1% lower in price & concurrently thinner in order size…
Watching VivaLaBitcoin liquidate 45,000,000 tokens in order to recuperate the same amount of expenses, that should have been recuperated with only 13,700,000 tokens; we see that the open market clearly think’s VLBTC’s role as an independent micro-economy is severely overvalued 🤷♂️ (by about 328.47% or 3.28x)
We now have to revamp the tokenomics; adjusted for the open markets influence on it
We didn’t even get the ball rolling yet…
This price discovery happens less than a week after the initial Launch; not to mention that only 50% of the tokens in circulation were redeemed. The remaining tokens in circulation are thrown on the open market, holdled somewhere in a wallet, or waiting to be used for the appropriation of mining service sometime in the future.
As time goes on, the constant downwards pressure created on the market by the LVBTC business selling its tokens in order to sustain business-as-usual; will destroy the ecosystem’s economic value, until the token’s value reaches a maximum possible “floor ”(theoretic concept) or ceases to exist…
The theoretic “floor” is identified as the minimum viable value need for the existence of LVBTC token as a payment.
This can be found by:
Where does that leave us?
Well, The tokens launched being worth $0.1 each; Falling to $0.0000189 is a -99.9811% decrease… that means every $1,000 that one might have invested and held is now worth $0.0189 (just above 5% less than 2 cents).
This is a VERY extreme situation and is meant to serve strictly as a loose representation of how Premature Adoption coupled with a Fallible Economic Structure can cause financial martyrdom…
So, does it still seem sensible to be an early adopter?
In my opinion: HELL YES!
Just do so from a well-informed vantage point & DYOR-Do Your Own Research
🤓 Explore Bravely 🤓
🕋 May the Blockchain Be with you 🕋
🍜 Food for thought🍜
Do not underestimate the irrationality of the markets…
When involved with any form of chart analysis: just because an asset has fallen to new lows / 99% from its peak, does not mean it cannot fall any lower.
If an asset Peaks at $100.00 and then over the course of 2 years tumbles to $1.00 does not mean that it wont go to lower levels of $0.50; easily costing somebody 50% of their entire position!
If, somebody loses 50% of their portfolio value – they must now make back 100% on their current portfolio balance!
As an example:
Somebody who bought bitcoin at $20,000 and is now holding a $4,000 bitcoin has lost -80%. In order to Just break even with their investment, Bitcoin must now gain +400%.
“There is more ground to cover on the way up than on the way down”
To Adopt or Not to Adopt; is that Even a Question? was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.