The energy around cryptocurrencies and blockchain technology stands out as a rare positive growth story among a sea of depressing technology narratives in 2017.
This year I wrote two columns about cryptocurrency, detailing in May why it was time for the broader technology community to be spending time understanding what was going on in cryptocurrencies and in July some key questions around the summer ICO boom. Alexia Bonatsos and I also did podcasts on the fascinating questions around the future of VCs in a world of crowdfunding ICOs, and on the politics and implications of crypto-forks.
After what was by all measures a breakout year in the cryptocurrency world, what will 2018 look like? Here are a set of predictions about the coming year in digital currency.
1. Bitcoin Will Grow Its Market Share of Crypto
Currencies have three fundamental properties. They function in some combination as a store of value, a medium of exchange and record of account.
While bitcoin is very unlikely to be a strong player as a medium of exchange, or fulfill the full vision of the future of blockchain technology as a record of asset accounts, it is on course to be a version of modern gold—an important commodity and global store of value.
The idea that you can have a successful store of value that isn’t used as a medium of exchange can be hard to grasp. We have lived through a recent period of global currency consolidation, where a few instruments like the dollar, the renminbi and the euro have played a dominant role, backed by global hegemons.
But this isn’t the historical norm, or even the global norm today. The Spartans used heavy indivisible iron rods rather than coins as a form of currency to store wealth that was intentionally hard to transact, in order to promote social stability. Gold isn’t exactly a day-to-day transaction medium, nor is real estate or the two-thirds of $100 bills in circulation held outside of the U.S. by people looking to limit exposure to their local regions.
If you believe that the value of bitcoin will grow along the lines of Metcalfe’s law, just like telephone networks and social networks, you should expect the growing brand of bitcoin and a growing number of people who hold the currency to drive a rise in its price. But the spread need not come from day-to-day use in commerce the way a currency might have needed to grow in an earlier era. In the age of frictionless online distribution and access online, the growth can happen more rapidly with an expanding brand and relatively fewer on-ramps.
2017 was an anomalous year where bitcoin declined as a percentage of all crypto asset value. But I believe that in 2018 it will not only grow on absolute terms, but also grow as a percentage of all value represented by the top 100 cryptocurrencies on the tailwind of its high-profile brand, and rapidly falling barriers to acquisition.
2. Limited Consumer Use of Cryptocurrencies
If the first use of currency is as a store of value, the second is as a medium of exchange to trade for goods and services. The story in 2018 is going to be less clear.
There are specific vertical use cases like bank-to-bank cross border payment rails where specific crypto currencies make a lot of sense. I believe, for instance, that Ripple’s XRP currency has a clear and valuable place in the bank to bank market.
It is also possible that bitcoin cash, dash, or other coins that are designed to be transacted efficiently will grow into more of a transactional use case. But I don’t think we are on the brink of seeing consumers use cryptocurrencies to buy real world goods and services.
This is mostly because the on- and off-ramps between the crypto ecosystem and local currencies remain just too difficult, and I think will continue to be for the foreseeable future. People will still want to settle in and out to other instruments for a long time to come.
It is also because of taxes. The people who would be most likely to transact in crypto assets are those who have seen a lot of gains, and therefore would face a big tax bill to sell them.
Some people think that the reason there is limited use of cryptocurrency as a medium of exchange is that it is just too volatile to price things against coins versus dollars. While a challenge, I don’t think that is a major problem in an era when we have real-time pricing updates.
So I don’t think 2018 will be a year where anyone is buying loaves of bread in cryptocurrencies. And in all likelihood, 2019 won’t be, either.
3. There Will Be Big Steps Forward in Distributed Ledger of Accounts
I am obviously very bullish about the store of value story, and relatively skeptical about the general medium of exchange story, but it feels clear to me that the “record of account” aspect of cryptocurrencies is truly the world-changing opportunity, and one that I expect to start seeing come to fruition sooner than later.
If ICOs were a key consumer story of 2017, I believe that the first real uses at scale of smart contracts to securitize real-world assets on blockchains should be a big story in 2018.
It is simply too big an opportunity to change the world for it not to start happening.
In the current state of the world, almost everyone and every business has access to some form of debt financing. But equity financing is only available to a tiny fraction of players—those who are either very large, or happen to be in a few privileged pockets like the Silicon Valley technology community.
The real promise of a distributed ledger is the ability to securitize almost anything, and offer equity financing for a far wider array of businesses and assets than have had access to it before.
If the blockchain can serve as the backbone for computer-driven monitoring and trading of millions of assets versus the mere hundreds or thousands that a mere human can manage, it opens up new types of access to capital and financial products. Ideally it would do so in such a way that knowledge and information is preserved and processable instead of being obscured in packaged products the way mortgages were leading up to the U.S. financial crisis a decade ago.
Getting to this vision is very difficult, and poses several specific problems like how you marry contracting and securitization on the blockchain back to the real world in a trustless or at least a clearly defined way. There also are all sorts of legal ramifications to work out, made all the more complicated by the global nature of cryptocurrencies,
These developments are so important, and there are so many great teams working on it that I am willing to wager that 2018 is going to be a breakout year for this narrative. I think a few things will start to fall into place to allow things like the securitization of real estate to begin in earnest.
4. Relative Decline of Distributed Computer Narrative, at Least for Now
The only thing that is bigger than a flexible and distributed ledger of accounts with smart contracting is having a fully baked distributed computer capable of executing nearly any code.
In 2017, largely because of the huge growth and interest around Ethereum, the idea that blockchain technology could underpin a fully distributed computing platform has been all the rage. I think this notion is going to face some headwinds in 2018, because no one can figure out what exactly to use a distributed computer for beyond games like CryptoKitties.
It is possible that a use case will emerge for a distributed computer, but with the given that any distributed system won’t perform as well and is harder to build than a more centralized competitor, the idea of building decentralized competitors to run existing companies is far-fetched.
The real exercise that has to be conducted for the blockchain to be practically useful as a computer is to figure out what to do with a very large, very slow computing system whose principal value is the belief that it can’t be undermined by anyone.
5. New Retail Speculators Will Drive Up ‘Penny-Coin’ Volatility
It is clear that just as institutional investors are moving into the crypto space, so too are many small retail investors and retail gamblers. Some of these are driven entirely by the fear of missing out on a wealth creation moment and many of whom are getting in over their heads.
If you want to get a sense of this, all you need to do is read through the increasing volume of online marketing of ICOs, crypto-trading trading seminars, and ways to buy various coins on credit.
It makes sense and is a sign of health to see both small retail investors showing up and a marketing machine growing to help onboard them. Especially when you think globally, most of the world’s population is unable to access good growth investment opportunities. Even in the U.S., ever-later IPO-ing companies together with an extremely low volatility and shrinking public market, makes returns hard to generate. With people worried about retirement, it is unsurprising to see both prudent small investors and imprudent speculators jump into something that is accessible for investment, and has multiples of possible returns instead of single-digit percents.
Yet even if the retail investment is understandable in that context, it is a dangerous game for people to be playing. It also is one they will likely lose. That’s especially true for the gamblers in the bunch who fall prey to the online hucksters who aren’t actually pitching bitcoin.
Short term, this should cause marketing-driven volatility, especially around the long tail of micro-coins where marketers are telling retail investors the greatest gains can be found.
In the medium term, I think you will see these capital flows coming out of the micro-coins and flowing back into bitcoin and the larger currencies as people abandon the long tail but still want to keep money in crypto.
The upshot is that there will be boom and busts among long tail crypto-assets. Skittish retail investors, while not controlling most of the volume of major coins, will be less steady at the helm than large institutions and long term holders. But I think that in 2018 all the people streaming into crypto-currencies speculating on the long tail will end up seeking shelter in the top few currencies.
6. There Will Be More Healthy Forking of the Largest Projects
Managing the politics of open source projects is notoriously difficult. So much so, in fact, that one of the biggest problems with open source software tends to be just how difficult it is to get consensus and move quickly to improve systems in response to more closed and nimble competitors.
All these problems are magnified in the case of crypto-currencies, where you have groups of miners and developers with different philosophies and financial incentives.
In light of this, I personally couldn’t be happier with how the forks of bitcoin have gone this year with the creation of bitcoin cash and bitcoin gold.
Forking a currency allows splinter groups to try a direction for innovation or something new, without needing to bring the entire community along with them. It’s an awesome pattern that I hope continues and allows large communities of developers to collaborate happily and successfully, while also allowing a steam release valve where groups can break off and try something new.
I know that this is not a universally shared perspective, and people worry that forking of crypto-currencies dilutes them or creates strange competitive situations that can hurt stability of the system and user trust.
But the reality is that cryptocurrencies are still in their infancy, and I would rather see paths for more innovation than less. So long as it turns out that one of the best ways to bootstrap a new experiment is by giving the current holders in bitcoin or any other major forked coin an equal share in the experiment, it seems like a healthy pattern of innovation.
I expect in 2018 that there will be more forks coming of the major cryptocurrencies as different groups look for nimble ways to experiment and move the systems forward.
7. Forks Will Lead to a Knife Fight at Some Point
Even though forks are a healthy pattern for innovation, there is an outstanding liability in the fact that factions that are ostensibly competing with each other hold a lot of value on the other’s chain.
The boosters of BCH hold a lot of BTC, and the boosters of BTC hold a lot of BCH. This might be all well and good if each successively forked chain finds its own place and grows in value. But the ability of major holders to manipulate the markets of competing coins is obviously a complicated game.
At some point in 2018, in the context of some major fork, I predict there is going to be a public knife fight where one variant of a coin is going to try explicitly to undermine another.
8. There Will Be a Relative Decline of ICOs and Consolidation of Value
The ICO party is clearly over, at least in its most recent incarnation. There will be ICOs in 2018 just as there were ICOs before the summer of 2017, but the go-go moment is behind us.
There are a few reasons for this. First, basically everyone has come to agree that these are by and large securities, subject to regulation.
Second, where initially there was a pump-and-dump opportunity for those investing in ICOs in pre-sales with massive discounts and profit taking on day one (like IPOs), those opportunities have become quite limited as organizations have gotten more sophisticated with ICOs. Vesting schedules that have started to be introduced in most major ICOs slow down the ability for people to turn a quick buck. And as the underlying prices of ETH and BTC have risen, a lot of ICOs that looked like good deals at the time are quickly turning negative for investors compared with the option of just holding major coins.
There will be exceptions where great teams raise serious amounts of capital for great projects in 2018. But the excitement over the summer that ICOs were the future of capital raising I think are largely behind us, and I expect very few large ICOs next year.
9. Relative Rise of Privacy Coins and Stable Coins
There are two classes of coins that will likely grow next year in importance and value because they address clear challenges with the current ecosystem.
The first is coins that are designed with privacy in mind. There is this deep irony that people continue to think of bitcoin as some sort of anonymous system, ideal for criminal activity—when, in fact, it is fully transparent and perhaps the worst way to conduct any sort of business that you want to hide.
The second is coins that are designed to not massively fluctuate in value so that they can be traded more easily, known as “stable coins.” Tether, which is a pseudo-stable coin pegged to the U.S. dollar and has recently come under scrutiny after a large hack demonstrated the need. But it isn’t a complete solution.
There is a real need for privacy, and there is a real need for stability. Privacy is a more easily solved problem, but both should be addressable. I expect that by the end of the year the privacy coins like ZCASH and Monero will have appreciated meaningfully even in relation to the broader market, and there will be quality stablecoin projects live.
10. Picks-and-Shovel Business Unicorns
Coinbase is currently the Valley darling and one of the newest minted unicorns. It isn’t the only one. The reality is that around the crypto-currency ecosystem there are plenty of compelling traditional businesses to be built.
There are many teams working on building a “Bloomberg for crypto.” There also is an enormous custodian business to be built so funds can operate in the space. The derivatives game is just starting. The list goes on.
Marrying crypto into the existing global institutional and retail banking infrastructure is a place billions will be made. My expectation is that by the end of 2018 Coinbase will not be the only unicorn in the space, and there will be heavy investment in a range of obvious but hard things that need to be built.
11. Venture Capitalists Will All Come to the Party, but Won't Dance Much
Several venture capitalists have made good calls investing in pick-and-shovel businesses over the last several years. But precious few have been investing directly in crypto coins and assets, and in fact most partnership agreements bar VCs from those types of investments.
Yet most major venture capitalists have, or are in the process of, amended their limited partnership agreements to allow them to invest in coins and other crypto-assets.
In 2018 buying coins and investing in early-stage crypto projects is going to be something that all venture capitalists are hearing pitches on and debating.
It isn’t completely clear to me, however, exactly what deals will get done or how they change all that much. I am sure VCs will support some early-stage incubators and make spot investments in projects being put together by well known entrepreneurs, but I actually think that VCs will be cautious about coin investing in 2018 and mostly stay on the sidelines.
Of course, I also think there will be far fewer legitimate ICOs next year, so there are fewer investment opportunities to begin with.
In the end, I think by the end of 2018 all major VCs will be set up to invest in crypto, but very few will have done significant investing in coins throughout the year.
12. Nation-States Will Be Mining Crypto by End of the Year
When the revelations involving Edward Snowden’s NSA leak came to light, my first reaction was to be impressed with the technical acumen and reach of the U.S. government. Legality aside, before his leaks I wouldn’t have thought the government technically as capable as it was demonstrated to be.
With that mentality as a backdrop, it is doubtful that the major world governments aren’t already deep in the process of figuring out how to have a seat at the crypto-currency table on both policy and technical fronts.
Several governments have the technical know-how and the clear incentive to be in the game.
There is the long-term economics question of how to think about a world where globalized money makes it harder for even large countries to enact the same type of fiscal policy they have for the last hundred years. There is the technical question about how different nations try to promote or undermine the integrity of the crypto-markets to their advantage. There are security questions of how the blockchain can be used to find everything from people evading taxes to terrorists.
It will be very difficult to check up on this prediction, because I think it is very unlikely that any nation-state will be overly transparent with what their tactics are. But I suspect that by the end of 2018—if it hasn’t happened already—Russia, the U.S. and China all will be mining cryptocurrencies and spending a lot of technical time monitoring transactions.
13. There Will Be Early Signs of Global Economic Impact
In the middle of the recent turmoil in Zimbabwe, the price of bitcoin in the country was trading around $13,000 a coin, as people that could looked to shift assets safely out of the country. At the time that was almost two times the global price that was being paid for bitcoin. Just two weeks later, however, it is only about a 15% premium.
A 15% premium is a small price to pay for getting capital out of a country during a military coup, and nothing compared with the hyperinflation that has happened repeatedly when countries hit serious economic hurdles.
If nationless cryptocurrencies are starting to allow people to more easily access globally accepted stable means of storing value that are less susceptible to confiscation or local inflation, there is an argument we are already seeing a real economic impact of cryptocurrency.
That said, it is clear that we are still in the first inning of understanding what the impact of globalized money will be.
It could be that cryptocurrencies display some of the same patterns of impact as the euro did in Europe— creating more frictionless interactions for people, but taking away some of each local country’s ability to manage its fiscal policy independently.
It could be that cryptocurrencies follow the pattern of cellphones and have an even bigger impact on the developing world than the developed world. With cellphones, the developing world was effectively able to skip from no telephone infrastructure to efficient mobile infrastructure, whereas the developed world poured enormous resources into wire-line services for decades. In finance, the equivalent would be that the developing world could catch up to the developed world without needing the heavy investment to create its own robust banking infrastructure.
It could be something completely different.
What I do suspect is that in 2018 the discussion about the global impact of cryptocurrency will start to happen in earnest.
14. Jamie Dimon Won't Buy Bitcoin
Someone recently said to me that he knew we weren’t in a bitcoin bubble when Jamie Dimon called bitcoin a bubble.
His point was that bubbles only happen once the bears all capitulate and buy into the hype. In the case of the internet bubble of the late 1990s, the bubble popped about six months after the long-term internet skeptics gave up and bought in.
So as long as people keep calling bitcoin a bubble, and even more ideally if they start shorting it when trading platforms open up this month, bitcoin isn’t a bubble.
My prediction is that in 2018 Jamie Dimon will not buy bitcoin or any other top crypto asset. And that gives me confidence to continue to stay long.
Conclusion
It has been very exciting to watch the energy pouring into the cryptocurrency sector in the last year. My predictions belie a belief that a lot of the theory that has been bandied about in the crypto space in the last several years is becoming real and consequential, and that 2018 is going to be another important year in the history of computer money.
Which brings me to my final prediction, which is that at the end of 2018 the average of infinity and zero will still be infinity.
I look forward to grading myself on these in 12 months’ time.
Sam has investments in several crypto currencies, funds, and enabling technologies and platforms.