In the last few weeks there have been massive runups in several cryptocurrencies. The market capitalization of Bitcoin has doubled since the start of the year to the equivalent of more than $30 billion. Currencies like Ethereum and Ripple are up even more sharply in the last two months. Ethereum is up 10 times to a capitalization of more than $10 billion and Ripple is up on the order of 40 times.
The blockchain, originally expressed in Bitcoin, is arguably the most disruptive social idea since the internet itself. But being a disruptive idea is not a guarantee of adoption or actual disruption. The jury has been out for the last several years on whether Bitcoin and its descendants would actually change the world—or remain some clever thinking with a niche audience and application.
The recent runups are at least partially driven by tulip-esque speculation by the unsophisticated as well as capital flight from places like China and, sadly, the U.S. (at least on the margin). But there is also something deeper going on in the crypto community. The activity and excitement around the communities truly feel a lot like the early days of the internet. And it is looking more and more like cryptocurrencies are indeed on the path to a very important and powerful role in the world’s economy.
If you haven’t been paying attention to cryptocurrencies yet, now is the time to start watching intently.
Crypto-equity Emerges as Killer ‘App’
To date, much of the mainline discussion about crypto has focused on blockchains with traditional currency analogies—as “stores of value” or “mediums of exchange”.
Right now, we are witnessing a new line of thinking taking hold—that the real use case for cryptocurrencies is to form an equity market, not a currency market.
In a crypto-equity market, each coin or token can be mapped to a real-world asset, just like a share of stock in a private company. Entities can raise real capital to pursue their objectives in ICOs (initial coin offerings), which in a sense are akin to historical IPOs. Purchasers of these tokenized shares can hold their ownership stakes in a wallet, and then freely trade them, creating synthetic products by aggregating them, and more.
This isn’t just theory at this point. Several companies have raised tens of millions of dollars in these ICOs, and many more ICOs are now on the way. AngelList just announced coinlist.co to organize and host these token-based capital raises from accredited investors. Ethereum, which is the primary platform in many of these financings, has made it sufficiently easy for people to mint new tokens and run crowdfunded ICOs that in theory any technical person could issue their own coins.
If this was just a slightly different or cooler way to do a traditional equity offering, it wouldn’t be that important. But crypto-equity meaningfully changes the game for selling equity in companies and assets because it erases most of the traditional friction associated with private equity sales.
Historically, if you want to sell equity on the private market, either in an initial offering or later in a secondary transaction, you face meaningful legal and administrative overhead. You need to deal with opaque contracts and legal drafting, sending around tons of paper, holding and managing stock certificates, and more. Moving to a token-based approach makes contracting much clearer and easier. Things like transfer restrictions can literally be programmed directly into the contracts issued. It also cleans up the mess of paper—largely now managed via DocuSign and eShares—which slows the private markets to a crawl.
With a developed blockchain ecosystem for equity-oriented tokens, you can see a world developing where we can handle, own and trade far larger numbers and more varieties of equities seamlessly. A hundred years ago we didn’t have the information and technology capacity to meaningfully handle more than a handful of public equities. Now we are able to handle thousands, and blockchain technology will allow us to own and trade slices in millions and millions of assets without cash in the middle. It will also enable us to efficiently build derivatives, and more.
There is more to do for this vision to become a reality. There will have to be more of a regulatory framework developed, and likely we will have to go through a few boom-and-busts and scams on the way to growth. There are also interesting questions of how to generate sufficient liquidity for micro-equities represented by tokens to be tradeable. That’s a problem faced by private companies today but compounded in this future world. But when it comes to rethinking how we interact with each other as people and hold and trade value, it seems like we are meaningfully on a course to the future.
I for one seriously believe that the next time I raise or invest in private equities, it is going to be done via a blockchain.
Blockchain Organizations as Communities
Blockchains like Bitcoin and Ethereum are mostly open source democratic-esque organizations, or, as it is sometimes put, “decentralized startups”. While there have been successful “open source” startups, blockchain organizations face particularly complicated politics to navigate.
First, in the case of some currencies there is the problem that the keepers of the software project and “miners”—people who run big computer systems to facilitate crypto transactions—aren’t always aligned in what they want. Second, unlike normal open source projects, they can’t simply disagree about a course of action and go their separate directions in development. There is the core asset—the value of the underlying currency—which everyone has a shared interest in protecting.
As with any new form of organization, there is still a lot of pathfinding on how to actually operate, settle debates and evolve successfully. For instance, there is a very interesting debate raging right now in the Bitcoin community on how to evolve the platform. Various groups are threatening each other with drastic action.
That said, it does seem like communities are learning how to interact and evolve, and demonstrating durability. One example is the successful fork of Ethereum, which produced Ethereum and Ethereum Classic as two separate coins and ecosystems. After a lot of tense fighting, a community successfully split and each side has gone a separate way.
Because these blockchain-based organizations are a new breed of organization, the fact that successful splits have happened creates more trust in the platform. Still, there is much more to learn and resolve.
The Blockchain Network + Wealth Effect
The last several months may have seen some of the fastest wealth creation at any meaningful scale ever witnessed around the blockchain community. This is especially poignant in that—unlike private market investing—the opportunity has been open to almost anyone, and the returns can be converted to dollars.
If this were just some casino game, it would be easily lost to a footnote in history. But the blockchains whose token values are exploding are fundamentally networks, and that makes all the difference.
To the extent that blockchains, like predecessor networks, are valuable in relation to their scale, these moments of wealth creation attract more participants, which creates more liquidity and value. Growth begets more growth—not just for messenger apps, but also for more sophisticated forms of human exchange.
Setting aside network math, the wealth effect of appreciating tokens has a meaningful impact all on its own. I have noted this in myself and several friends who have been investing in and around the ecosystem. The people building and investing in the infrastructure around these projects are far more willing to invest more, thanks to gains in value. A lot of people now have the economic staying power and incentive to continue to help open up the ecosystem for the long term.
The 2017 Story
We are in a period of clear exuberance about blockchains. It is extremely likely that there will be another major correction at some point, not unlike the correction after the 2013 end-of-year runup—at least in some tokens and platforms.
There is also real infrastructure to be built—binding the crypto world to real-world assets, resolving regulatory questions, and learning as groups how to collaborate and healthily disagree in hyperdemocratic (or not) blockchain organizations. This is all in addition to the growth necessary for wide acceptance of tokens as a medium of exchange, and broad acknowledgement of value in the case of things like Bitcoin.
All that said, when you step back, it is hard to not acknowledge major steps forward in blockchains moving from being a fascinating idea to a very real and powerful platform on which great things are being built.
Platforms that are built ahead of a clear primary use case usually fail to gain adoption, but it may be that we are witnessing a critical exception.
Sam has active investments in bitcoin, ethereum, ripple, several other crypto-currencies and several enabling technologies.