It was a busy week for the cryptocurrency industry in New York, with in-person conferences, workshops and parties filled to the brim with crypto enthusiasts. After the shutdowns of COVID-19, it had the feel of a revival. And while this was nothing like the crowds of Consensus 2018, it also felt like the continued gains in decentralized finance (DeFi) usage, non-fungible token (NFT) markets and altcoin tokens were showing up in that particular breed of hype and buzz this community tends to muster during times of speculative fervor. This week’s column explains why this is not only inevitable but, in a volatile but catalytic way, a key driver of growth.
Meanwhile, in this week’s episode of the “Money Reimagined” podcast, my co-host Sheila Warren and I conduct the second in our “OG” interview series with legendary investor Bill Tai, who began mining bitcoin in 2010 and has been an early investor in success stories such as Zoom and Canva. Tai is now helping a team called Nfinita harness the power of NFT communities to raise money for charitable causes. Nfinita’s CEO Danny Yang joined in the conversation.
Have a listen after reading the newsletter.
How the crypto hype machine breeds innovation
Two images prominently displayed on multiple LED screens caught my attention as I wandered New York’s Javits Center during Monday’s opening of SkyBridge Capital’s SALT conference: a sponsor board stacked with crypto companies’ logos and a promo for a talk by newly converted NFT fanatic Paris Hilton.
Juxtaposed, those images conjured a question that often arises whenever cryptocurrencies are in a bull market phase: Is the noise a sign the industry is poised for explosive, mainstream integration, or are we seeing the kind of over-hyped, celebrity-infused excess that portends an imminent collapse in crypto markets?
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The more I think about it, the more I think the answer is “both.”
That might seem contradictory. So, let me try to break down why it’s not and also explain why this Wild West, boom-bust state of affairs is an unavoidable, intrinsic feature of how this industry innovates and grows.
First, let’s separately consider each state for Schrodinger’s Cat here.
On the one hand, the hyped-up presence reflects a cashed-up industry with both the financial wherewithal and the motivation to try to woo the deep-pocketed institutions attending one of the investing industry’s biggest annual conferences. Why would digital asset companies like lead sponsor NYDIG take on such a large, expensive presence at SALT if they didn’t sense a huge, growing opportunity from institutional investors?
After all, the SALT main stage, featuring multiple crypto-themed sessions, delivered story after story of hedge funds and other traditional financial institutions exploring ever more adventurous investing strategies in bitcoin, DeFi and even NFTs.
On the other hand, there was a very late-2017 feel to the crypto presence, not only with SALT’s own celebrity lineup but at numerous other sideline conferences in New York, such as the Digital Assets Summit, and at late-night parties at rooftop bars and expensive dinners. It’s hard not to worry that as NFTs and various “Eth-killer” altcoin tokens reach lofty new heights, that we’re due for a rerun of the 2018 “Crypto Winter” that followed the previous year’s initial coin offering (ICO) bubble.
Here’s the thing: it’s possible to project – and to prepare – for that selloff while still remaining strongly convinced that the frenetic investment and marketing activity is a sign of bigger, more important things to come. An amped-up money and hype machine is a fundamental driver of the self-perpetuating cycle of innovation and development that is growing and will continue to grow the crypto ecosystem.
People will lose their shirts, yes. But before then, these unfortunate buy-high-sell-low victims will have contributed to the rapid capital formation and opportunity creation that’s building the technical and social infrastructure of a new, decentralized financial system.
Economist Carlota Perez has famously shown that at key technological turning points in history, speculative bubbles have been integral to how society incorporates transformative technologies into the economy. Even as it fuels hype, along with momentum trading and big price overruns, the cheap money generated by investor speculation flows into a growing variety of new projects and enterprises that are built on the new technology. This helps to establish the technology and create a base for the economic transformation it later enables.
A good example was the dot-com bubble of the late nineties. At the time, a great deal of attention went to investor losses from doomed projects such as Pets.com. There was far less discussion of how the financial capital unlocked during the bubble funded the rollout of fiber-optic cable, the development of key technologies such as algorithmic search or the advances in mobile computing. That money laid the foundation for the creation of new, massively marketable services in the Internet 2.0 era, led by companies such as Google, Amazon, Facebook and Apple.
Bubbles in crypto play a similar function – including the derisively viewed ICO boom – and, arguably with even more impact, for two structural reasons.
One key difference between crypto and important late-90s software, such as Google’s search algorithm, is that the major breakthroughs in the former tend to be based on non-proprietary open-source code. When developers don’t need to ask for permission to build on a new technology, it’s an inherently more powerful driver of collective innovation and new products.
People will lose their shirts, yes. But before then, these unfortunate buy-high-sell-low victims will have contributed to the rapid capital formation and opportunity creation
The other is that money cycles through the crypto ecosystem at a much faster rate than it has in any other tech boom. That’s not only because token price gains tend to be so large, enriching investors and developers who then reinvest their winnings in new projects. It’s because cryptocurrencies literally have faster velocity, mostly because they are based on near-real-time, intermediary-free settlement. Check out Coin Metrics research on how frequently a single tether token changes hands and a picture emerges of a sub-economy that’s generating income and wealth far more quickly than the one that depends on fiat money.
Fueled by passion
Those structural differences between the crypto and fiat economies are important. But I believe there’s also something more intangible yet no less catalytic at play: passion. That, and the hype that comes out of it, are intrinsic to the crypto innovation cycle.
We can think of crypto as an ever-burgeoning market for ideas.
Think of all the dreamers it attracts, the kind of people who go for broke on an idea that normal people would consider impossible – like inventing an entirely new system of money.
At every crypto conference I go to, there seems to be an entirely new batch of newcomers who’ve just found the opportunity too big to resist: everyone from high-school-age engineers building new DeFi “legos” in their basement to Wall Street traders who’ve given up on the button-down world of TradFi to build a very different system.
This represents a powerful cauldron of creativity. Most of the creations that emerge out of it – the new protocols, the apps, the projects and schemes – will fail. Some of those failures are because the projects are built on nothing but hot air and, sadly, in many cases, on outright scams.
But a good number will win. And that’s greatly helped by the fact that in this entrepreneurial culture, to a degree I’ve never encountered before, failure is entirely acceptable. It is viewed as a learning opportunity upon which to iterate.
So, yes, there will be wild ups and downs. Prices will fluctuate and the mainstream media will continue to point that out to the outside world. But it’s all part of the process. There is no straight-line route to where we are going.