X-Order is an investment and research organization dedicated to the study of value capture in open finance, founded by Tony Tao. We strive to be a bridge between new finance and interdisciplinary fields with relation to science and research. Tony Tao is also a partner at NGC Ventures.
“Till the end of 2020, what do you think are the futures of the token market?”
In early September, we had a debate within X-Order about the future of the token market. Interestingly, our views are divided into two opposing sides, which sparked a cross-pollination of thoughts during the discussion.
Proposition: In 2020 or even further down the road, the token market’s developments will be increasingly positive. During this period of time, after structural adjustments, the market will regain its vitality and become “healthier”.
Opposition: Apart from Bitcoin, the existing altcoins market will not only not get any better, but there will be even lesser investment opportunities available.
Arguments by the Proposition
Viewpoint 1: A good market is where participants are becoming more rational with the ability to understand the value of the subjects in the market.
Good markets have the following characteristics:
- Market participants are able to gain a clearer understanding of the intrinsic values of the market subjects.
- The market can abandon models that are inferior and continuously try out new models. These new models, after standing through the test of the market, will be retained.
- Some of the prices in the market are aligned with the fair value of the subjects themselves. In other words, the Bubble Index of these subjects is relatively low. From the perspective of investment, participating in this market is relatively a good value investment.
The Cryptocurrency industry is in this stage right now. A few altcoins will survive or get better in the short term, but most will worsen rapidly.
This situation means that the participants in our market are becoming more rational. Investors in this industry may lose money, but their experience in value judgment will continue to improve. Although it will be painful, the market and its participants will grow with these experiences.
Viewpoint 2: The market will improve as long as there are good projects; high market volatility will continue to attract young people.
Some observations on the altcoin projects are as follows:
Prices of altcoins are not in sync with that of Bitcoin
The changes in the prices of altcoins have its own set of rules, which is not in sync with Bitcoin. In the first five months of this year, the growth rate of altcoin exceeded that of Bitcoin. Thereafter, it was the decline of altcoins and the hike of Bitcoin.
Most altcoins are highly centralized
Unlike Bitcoin, the value of altcoins is in centralization, which means that there are teams working on projects. Hence, we can perform a fundamental analysis of the project by analysing the teams.
Altcoins are constantly being replaced by new ones, with fast updates and iterations
To predict the token market, we cannot only look at a particular altcoin or a few altcoins because this is a market that is continuously updated. The death of one altcoin will not result in the demise of the market as there will be other new ones.
For example, most of the top ten cryptocurrencies that existed in June 2013 no longer exist now. The life cycle of an altcoin is very short, hence, there is no first-mover advantage. Therefore, altcoins that came up later gets more attention.
Why is the altcoin market as such?
1. Project Team: It is composed of latecomers, dreamers and ambitious people, who want the market to update and iterate quickly, and actively create fluctuations to obtain profits
2. Characteristics of Certain Investors: There objectively exists a contradiction between the fear of chasing highs and the desire to make money. For example, in the stock market, there are always people who do not buy the shares of Amazon, Apple, Maotai, etc., instead, they buy only some small-cap stocks with the view of obtaining excess earnings.
3. Exchange (Intermediary): Keep an open and welcome attitude towards altcoins. The exchange not only want to have Bitcoin in the market, but also for other altcoins to exist. If necessary, it also wants to create its own tradable currency.
Hence, the market is bound to improve as long as there are good projects in the future.
Viewpoint 3: So long as there are innovations and new projects in the token market, the industry will not die.
The development of the token market is based on countless failed explorations, and the industry will continue to innovate and evolve. Although many of them haven’t found a good profit model, it doesn’t mean they won’t in the future.
Things were similar at the beginning of the Internet’s development.
At the end of the 20th Century, due to the failure to find a good profit model, the Internet economy was not looked upon favourably, even to the extent that the dot-com bubble existed. However, after several companies actually delved into the industry proper, they found the advertising revenue model, which resulted in the rapid development of the Internet economy.
This model is based on the exploration of all previously failed projects. All industries must go through such a process from the very beginning before it can mature. Therefore, we cannot say that the token industry is in a state of death just because the current development is not at its best.
The cryptocurrency industry is still continuously evolving.
For example, there were 10 huge projects in 2018, and another 4 new huge projects in 2019.
Even though the short-term price fluctuation is huge, and even if all the currencies you are investing in are “dead”, the iteration of projects in the industry will continue. This will be so until there is a subject that can connect with the actual demand, bringing real vitality to the market.
Arguments of the Opposition
Viewpoint 1: The risk of the token market is high. When the amount of capital is large, it is better to choose a stable growth investment strategy.
From the perspective of investment, Bitcoin has certain investment value, while altcoins have no actual long-term values. The value of Bitcoin is such that about 10 million people around the world are trading it, which means that it has This is also true for a lot of user support and will not be blocked in the short term. ETH.
If we use the life cycle of elements to explain the rise and fall of Bitcoin, its half-life is only about 3–5 days. This can be seen from the steep fall in price at the end of 2017. BTC fell from nearly 20,000 USD to 12,000 USD. Very few are able to seize such an opportunity in a market that changes rapidly.
In such a market, even though the return might be very high but the associated risk is huge as well.
Such a situation exists even for the major cryptocurrencies, let alone altcoins. The risks in investing in altcoins are not adequately compensated by their returns.
Nevertheless, investment strategies adopted by different capital sizes differ. When holding a considerable amount of capital, one needs to choose a stable growth strategy — stable income and less risk.
Viewpoint 2: Blockchain technology itself is valuable, but the prospect of the token market is not optimistic.
The main reasons are as follows:
- The entry of traditional large institutions, such as Facebook’s Libra and China’s DC / EP, may bring many actual usage opportunities and traditional users. Blockchain technology brings convenience to modern life and finance. The problem is that these projects have little to do with the traditional cryptocurrency industry. As retail investors, it is hard for us to participate in them. Even if these projects are finally implemented and proved to be feasible, it is bearish for the current projects in the token market.
- The token market has low entry barriers. On one hand, it can attract innovators to participate in it. On the other hand, it means that anyone can copy open-source projects at a low cost. In addition, there is basically no supervision, which leads to swindlers running rampant. It’s no exaggeration to say that most of the projects do not have much actual value. Hence, we must be careful and cautious to avoid stepping into traps and losing all our investments.
Among all sorts of projects with varying qualities, some can eventually succeed. What we need to do is to discover and participate in them as early as possible, of course, the pre-requisite would be to have good risk management in place.
Viewpoint 3: In the short term, there is no intrinsic value and cash flow to support the price of projects in the token market.
In the context of declining risk appetite and overdraft of most information, the current market situation is as follows:
- Digital currencies, led by Bitcoin, are aiming to become stores of value; Bitcoin’s recognition would open up new possibilities for others;
- Decentralized applications still have no users and cash flow;
- Most public chains have become useless products without cash flow, users and applications.
Moreover, relying on the traditional valuation methodology, the story and value no longer look sexy in the short term. If the token market wants to advance, the most direct way is to generate cash flow.
The details are as follows:
Most of the existing ICO projects rely on the funds raised by the “timeliness” at that time. While the project parties see a flood of funds, the investors see a liquidity premium of tokens.
In the short term, there is no intrinsic value and cash flow to support its price.
This creates two aspects of dislocation.
The first is that there exist misunderstandings of the project itself, that is, the timeliness of value discovery and realization is different between commercial projects and scientific research projects.
Science and technology research attaches importance to the front end, while business values the back end. However, the ethos of blockchain lies in that there is political incorrectness in over-commercialization itself. Further, high-end technological ideals have been even more sought after, which has led many project parties in the initial stage to think that their technology is very powerful, innovative and not in large-scale applications because the current infrastructure is not in place.
From the perspective of economic model design, it will be difficult to form a closed-loop system. In fact, there are indeed problems in the infrastructure but even more problems in the demand. Look at China, the 4 trillion infrastructure was built easily, but it took a long time to drive domestic demands.
The second is the dislocation of the funder’s side.
To put it bluntly, in the absence of a proper valuation system and cash flow; the so-called value investment can be better understood as an investment because you believe in the industry and the team, or the comparative investment of vertical or horizontal prices.
If we look at the fat protocol thesis, we can see an interesting phenomenon — in the early stage, layer1 public chain benefits from the fat protocol, and in the later stage, due to the fierce competition, the ideally more compatible layer2 and layer1 benefit even more from the fat protocol. However, in the end, they are left unused until now.
Since hyping on concepts brings money quickly, its desolation is bound to be very quick as well. With the different permutation and combination of various concepts, the marginal effect of newbies taking over the brunt of “new concepts” has been reduced greatly.
Therefore, in the environment of declining risk appetite and overdraft of most information, there are three approaches that the project parties can take: continue technology research and development (suitable for large projects such as Ethereum), which the price depends on the number of believers; play the pure capital game, which, however, has become increasingly difficult; or take the path of commercialized cash flow.
However, without the liquidity premium as the main short-term investment logic, there are also several corresponding directions for the investors: to invest in technology, engage in long-term equity investment and do not anticipate short-term cash flows; to continue pursuing “blind pools”, but the capacity is limited; or to invest in projects that can produce cash flow in the short-term.
The so-called investment logic of the cryptocurrency industry is getting closer to traditional capital. This signifies that it is increasingly bounded by the traditional logic with ICO losing its “open, equality, permissionless” appeal it had at the beginning.
In this debate, the proposition and opposition sides discussed their own predictions of the market from their perspectives.
The proposition side viewed the future from a broader perspective, they thought that the market will evolve and become rational. With altcoins’ continuously going through an iteration process, valuable and high-quality projects will appear after filtering.
While the opposition side viewed from the perspective of investors, they pointed out the problems that exists in the current market. This includes: the actual value of the projects is difficult to judge; the technology cannot be readily applied; there is no revenue model; and the investment risk is huge. Therefore, they are not optimistic on the future of the token market.
What are your views?
The following article will be an interview we did with Brian Arthur — the father of Complexity Economics, on his views on Bitcoin, blockchain, and predictions in the financial markets.
Originally published at https://www.datadriveninvestor.com on December 12, 2019.
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Translated by (via our WeChat Account): Xin Yue
Editor: Daphne Tan
X-Order Debates: Will the Cryptocurrency Industry be Dead or Alive? was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.