Bitcoin didn’t come into my vocabulary until about 2013. Back then, I could only envision it as a currency for the dark web, especially when Bitcoin companies were sponsoring hackathons and the resulting project demonstrations looked like anonymous drug transactions. That year, Bitcoin’s Year-over-Year change was just shy of 6000%. I walked away from it when I mined some Dogecoin, went to cash out, and the wallet was empty. $5 in mined coin was my threshold for fraud/loss in that experiment.

Cryptocurrency is definitely having a moment again. In late 2017, Angellist had sent out a newsletter that cryptocurrency investment and jobs were booming. Twitter was full of blockchain and ICO jokes. This prompted me to research the opportunities and risks of what I’ve considered a perpetually emerging tech. It’s tough to stay optimistic that this will not end badly. The current attitude of ICOs seems to be like a party of music chairs in which everyone knows that the music will stop soon and are fine with it as long as they aren’t last one standing. Still, the idealistic view of a transparent currency with built-in trust and low-cost transactions sounds innovative and inspiring.

Getting up to speed on the frenzy

First, I checked Coinmarketcap.com, which tracks cryptocurrency market capitalizations. In January 2018, there were just over 1400 coins and 42 of those had over a $2B USD marketcap. Those are the coins that are still active. Deadcoins tracks the 600+ coins that have since shut down.

Then, I watched YouTube. Jackson Palmer, the creator of Dogecoin has really informative videos posted. There is so much going on so quickly that he had to change from a pre-recorded, edited model to just live streaming. I recommend checking out his channel to learn the technical basics.

Are you a visual reader? Tess, from Chain, posted an amazing series on Medium that explains blockchain in emoji.

I’ve also read a few whitepapers, but for the most part, cryptocurrency whitepapers are selling the dream without having a tangible product. If you’re going to read anything, I suggest reading about regulation and legal analysis. Boring, yes, but if you want to stay compliant, it could help navigate you away from receiving a subpoena. Otherwise, hire a very good cryptocurrency attorneys and accountants. These groups will definitely be big winners in this space.

I went to a few conferences in the Silicon Valley where I witnessed a spectrum of quality. There were the get-rich-quick bros advising you to buy a lambo. Then there were the refreshing instances like Unikorn, an esports betting platform that took their pre-cryptocurrency community and tokens and created a compliant, tokenized economy to solve their commerce issues. I was also introduced to an AI group, dmed.ai, that is working to decentralize healthcare to lower costs and make services more accessible.  Even the investors ran the gamut of approaches on the cryptocurrency future: there were the skeptical traditional VC’s who would only invest when there’s equity and then there were the new investors who would only do ICO’s with a little equity. This is a signal that even venture capital in its decades-old elite ivory-tower form is about to get disrupted.

Key risks:  speculative, hackable, under-regulated.

After all this research, here’s why I started envisioning cryptocurrency as a dumpster fire.

1. Tokens are highly speculative.  My early research into companies that have done ICO has shown a lot of website landing pages with whitepapers and no prototype, which precludes paying customers. This is like watching $150 million get raised for a new kind of Kickstarter campaign in which a product that may never ship.

In some cases, when I followed the Github link on their website, the repository hadn’t been active in 6 months (at the time of this publishing) but their website announced that they closed a $7.2 million USD token sale.  Also, the users of the repository hadn’t been active on Github. If I were to speculate that groups like these are building on a private repository, then why bother building their product on the blockchain in which one of the core tenets is transparency? 

2. Exchanges are hackable and can be manipulated. Mt.Gox, Youbit, and Coincheck have demonstrated that exchanges is very hackable. Fraud is common. Have you been following the altcoin Tether and the exchange Bitfinex? Tether claims to be tied to the US Dollar, but it has never been properly audited . Even Jordan Belfort, the Wolf of Wall Street, suspects that Tether is a “massive fraud” being used to artificially lift the Bitcoin market. Now, it’s rare that I ever refer to Belfort, but I will cite him as an expert in identifying fraud. In December 2017, both Tether and Bitfinex were served subpoenas from the CFTC. This twitter feed, Bitfinexed, is providing excellent moment-to-moment coverage of Tether.

When I investigated companies with Reddit links on their websites, few customers were talking favorably about the service and one company had to warn its users about Reddit scammers posing as their customer support team and asking for private keys.

3. It’s under-regulated. Regulation is in the early stages and is slow to be implemented and enforced. Years after exchanges have been hacked and manipulated, the SEC is finally coming around to announcing that all exchanges must register. The SEC has a handle on so little on that even big law firms like WSGR are still thoughtfully trying to figure it out.

Looking beyond the bubble

So now that’s I’ve expressed my concerns about people being under-informed and scammed, I want to move forward with the optimistic possibilities of this emerging technology since some feel that the future will be tokenized: from retail to real estate. Will the cryptocurrency revolution be US-based? Unlikely. It will be in countries where the population is under-banked, meaning, a majority of the population does not have a bank account, and where governments having challenges in regulating their own currency. Where will the blockchain hubs be located? The rise of blockchain will happen in places that are welcoming to a decentralized network.

As part of my Cryptocurrency and Blockchain series, I’ll be discussing what I see as the current state of the sector and profiling who I think are the market leaders. I’m also compiling a list/infographic of the market landscape so register for my newsletter to be updated when those are available.