Why Jamie Dimon Will Have The Last Laugh (and so can you.)

Many of us fell in love with blockchain early. We believed in the new applications it will enable. And still do.

The rest of the world came later to the party. So now we stand surrounded by shaky Initial Coin Offerings (ICOs) making wild promises. We see arbitrary price swings in crypto-currencies — no rational method of valuation for good or bad.

It is clear that our decentralized vision of tomorrow must yet suffer some hard lessons of growing up. Bitcoin and crypto in general have big tests ahead.

How do we translate this awareness into actionable market intelligence? Same as we always do. By putting together the facts we know and drawing a logical conclusion.

Crypto and blockchain are still in the imagination phase

Nearly every token sale white paper has as a key theme. “The old way of (fill in industry to be disrupted) is centralized and inefficient, we envision a future where it is decentralized and awesome.” Ok, sure, imagining is easy. It is also true that in 1998, pretty much everyone could see that the Internet would revolutionize shopping someday.

So it’s worth noting that in 2016, online retail represented just under 12% of all retail sales. 12%. That’s a lot by some measures — but getting to 12% took 20 years. The next 20 years will bring much faster change of course. But the first meaningful shift to a new way of doing something usually takes some time.

There is a big leap from imagining to implementing the changes of a new enabling technology. Between the imagining and the implementing are some harrowing ups and downs.

Big price dips happen when the difficulty of this leap becomes clear and real valuations become possible.

Rewind: We’ve seen this movie before.

As an entrepreneur and coder during the 1990’s, I had a front row seat to the birth of the commercial Internet.

The parallels of today’s ICO craze with the dotcom IPO frenzy are instructive. Many misinterpret history though, more on that here.

Hard as this may be to believe, in the 90’s companies were raising tens of millions of dollars based almost solely on their name. The fact that they had procured some household word as a domain name was enough to give them market value. Pets.com is a famous example.

In general, dotcom business plans shaped up something like this:

  1. The Internet will be huge and http will change how we do nearly everything (no argument).
  2. There are only a limited number of simple words that elegantly tie a .com address to a big market.
  3. Therefore, it is essential to be first in a given space.
  4. Being first and staking out an Internet claim with a great domain in a big market is the key ingredient to success. The details will just fill in around it.

Hence, Pets.com (there are plenty more examples) went from $82 Million IPO to liquidation in 268 days.

Bubbles grow because we love rush of the bubble more than we fear the crash. Until the crash.

During the dotcom boom, the gatekeepers got greedy. Gatekeepers are supposed to point out holes in business plans. But venture capitalists, investment bankers, and securities analysts simply went along for the ride. Investors were not complaining, they grew richer by the day.

We loved the Internet from day one. We understood from the outset just how big it could be. Yet WE let greed get out of control, WE touted and bought shares in junky companies we knew didn’t have sound plans. And WE paid the price in the form of knee-jerk reaction by markets and regulators after the fall.

When lots of people (voters) eventually lost money in what amounted to scams, law-makers did what law-makers do. As a result, IPO is now a liquidity option for far fewer companies. New regulations (SarbOx) were created to replace personal responsibility. The heavy legal compliance cost and risk mean IPO isn’t worth the trouble for far more companies now.

Frivolous IPOs wrecked the IPO market. Where I come from we call it pissing in the pool.

Lather, rinse, repeat.

The very same thing will play out in cryptocurrency. Daily we watch more and more frivolous ICOs emerge. None have any anchor in a disciplined business plan. None have real accountability for founders.

A land-grab market is never a good one. It invites speculation and encourages manipulation. Can I really argue that if I create the very first Ethereum token for some application that no one will ever come along with anything better? That’s how valuation of IPOs in the dotcom era got out of control and the exact same thing is happening with ICOs, only worse.

Do we really think governments will not weigh in with regulation? At worst, governments could render whole swaths of the technology illegal or impose regulations and tariffs. At best announcing plans for formal regulation. Either action will almost certainly cause a mass run for the exit.

Unlike IPOs, ICOs decouple founder risk from reward — which is bound to end badly.

The long proven financing course for a new technology goes something like this:

  1. Founders work without pay to take their idea as far as they can without money from others. This is how they earn founder shares.
  2. Then, armed with this early work and a plan, they determine how much funding they may need to scale and solicit private investors.
  3. If the business passes the right milestones, founders and investors may prepare to offer shares to the public via IPO.

All along this path is a common theme. Founders have skin-in-the-game and suffer dilution in their interests if their plan performs poorly. The consequences of fraud are severe. So (hopefully) everyone is careful not to overpromise.

None of this is true with an ICO. There is no risk of dilution for the founders. There is no risk in over-promising. There is no regulatory or legal consequence for claims founders know are baseless.

The ICO skips all the discipline and accountability of professional investment. Taking money from others with no accountability is never good.

ICO token sales consistently skip over the most difficult part of any business plan: How, exactly, they will make profits.

Most ICO white papers I’ve read seem to take the “… And then a miracle occurs…,” philosophy of business development. The general theme is that decentralized is just better, people will just use it.

C’mon man. Nothing works that way. Getting markets to change is hard and it takes time and never goes as planned.

For example, a blockchain system can enable a solar panel to offer its energy for sale to the highest bidder through a smart contract. Details aside, it’s a perfectly acceptable use case. Very cool. But does that functionality solve a pressing problem?

Startup culture coined the term “solutionism” as shorthand for the old saw, “It’s a solution in search of a problem.” The fact that there’s now a word for it says something about how common it is with startups. In the ICO/Token/Blockchain/Crypto world solutionism marks the premise of most, if not all business plans.

Every token sale presents a white paper describing a new way to do something people already do. Since they all need to sell their token to fund development, they inevitably must present a vision of how the world will be when their new token is in use.

Traditional business plans for equity investors must show how the market is demanding the new solution. Token ICOs use their white paper as a sort of fairy tale to describe a bold new vision for how the world will work in the future.

These abstract stories are not tested against demand, competitive alternatives, economics. Not tested at all. They are presented as a bold future vision — with a heavy dose of FOMO — to create believers and drive token sales.

ICO white papers make ridiculous claims and no one calls them on it.

Blockchain is complicated. There is no getting around it. Understanding how these networks operate is difficult. It requires digging into the details and the details are difficult to grasp. That’s no excuse for accepting jargon-filled descriptions of unfinished technology. It is no excuse for failing to present a concise value proposition that a lay person can understand.

If you can’t tell the story in simple terms, it probably isn’t that great a story.

How proud are we of the crypto network of today? How does it need to mature to support global, mission critical services?

Bitcoin and Ether are mined mostly by opportunistic, hastily built data centers in China, Russia and Eastern Europe. And remember: The miners are the network. These data centers look nothing like network infrastructure companies we rely upon. By any serious, long-term business measure, these data centers are wanting. Most are temporary shacks setup to harvest profits from speculators chasing quick profits on the greater fool theory.

Are the mining centers running today’s public blockchain networks designed for the long haul? Are they likely to stay well maintained, disaster-proof, and up-to-date over the next several years or decades? What will they do if the reward for mining levels out or declines?

It adds up to this: If bitcoin is an asset then there must emerge a way to value it. If bitcoin is a currency then it must be approved for use in commerce by governments.

Cryptocurrency markets must arrive at some useful measure of value. It likely happens via a big crash. Only then can losers be weeded out and good ones survive.

But someone said cryptocurrencies are Antifragile?

Maybe so. Hardly matters. Their threat is not from chaos and stability but from its opposite.

I love and recommend the thinking of Nassim Nicholas Taleb. I share his distrust of institutions (perhaps why I’ve always chosen to work as an entrepreneur). His concept of anti-fragility teaches well how to think about how different systems react to stress, instability & chaos.

It is true that bitcoin (or cryptocurrencies in general) exhibit characteristics of anti-fragility. The idea of anti-fragility is that there are some systems which, when stressed, not only do not break, but actually get stronger. Get it? Not merely “not fragile” (doesn’t get weaker or break when stressed) but “anti fragile” (actually gets stronger).

Two of Taleb’s examples are airplanes (get better every time one crashes) and restaurants (same kind of thing). I won’t argue — much about cryptocurrencies suggests they will get stronger in response to certain stresses.

But systems that are anti-fragile with respect to chaos and stress, often perform poorly under heavy structure and regulation.

If you don’t believe me, ask someone who flew on an airplane or ate in a restaurant in a Soviet era Eastern Bloc country.

So — with all that dotcom experience, can we predict the future of cryptocurrency markets?

Well, yes actually.

There is too much economic activity in cryptocurrency and ICOs for governments to ignore. This, coupled with bad behavior of some participants will force government to eventually set policy. Values cannot align until it does. Government action could cause a crash or could come as a result of one, but come it will.

The smart money (sorry, but that includes Wall Street billionaires) knows that there is no way to objectively value crypto assets yet. The smart money knows it will get a chance to buy low when there is.

At a minimum — outlandish cryptocurrency valuations aside — most blockchain projects are overhyped and will never amount to much.

Governments regulate capital markets and pay attention when constituents scream. One way or another, governments will be forced to start intervening in ICOs. When they do, they will almost certainly also build a regulatory framework to address cryptocurrencies.

This is sure to happen, even if the “currency” part of cryptocurrency doesn’t spur financial regulation sooner, which of course, it very well may.

Either way, we can never assume we’ve passed a milestone in the crypto-bubble until we feel the “steadying” hand of government. Anti-fragility notwithstanding, cryptocurrencies are unlikely to fare well under outside rule-making.

After governments show their hand, we will start to understand the value of public blockchain networks.

Governments are sovereign over the means of trade within their borders. Even if it were practical to evade a watchful government (doubful) how many people would use bitcoin if their government made it a crime?

It is common wisdom that only “after the crash” will be begin to see which cryptocurrencies and tokens have value. I would add, “and also only after governments make clear their intentions.” Until government weighs in, we really don’t know what blockchain projects make sense nor how to value them.

Smart money plays a long game. Take some gains now to reinvest later.

I truly believe in public blockchains. They will — eventually — bring fundamental change to many major systems. But while the Internet may have fringes that slip outside government control, none slip too far. This will also be true of public blockchains. Bitcoin’s no exception. They will have to fall into a framework acceptable to the gatekeepers as they mature.

If you are lucky enough to have had money in cryptocurrencies for 6, 12, 24+ months and are wondering when to sell, please consider this:

Take your initial investment plus some profit, then set some gains aside for reinvestment in the event of — and only in the event of — a 90% crash.

Oh, I know, you don’t want to miss out as bitcoin soars past $50,000, $100,000 or whatever. Fine, don’t. Leave some in. But take real gains. Put them aside. Be the person who banked a profit on the first bubble and used the profits to buy Amazon.com in May of 2000 (so to speak).

In every bubble, there are a few wise investors who salt away some profits in the halcyon days to buy with a smile the day after it pops. Those investors are patient. They don’t try to time the upside.

They know the crash will come, and money they take as true profit on the way up — even if they take it only halfway up the hill — will buy far more value later on. The real bargains come when value becomes apparent. When it does, short term money runs away and prices drop.

They always do.

The opinions expressed here are just that — mere opinions. I am an individual and I neither give, nor seek, nor profit from, investment advice. This opinion column is to encourage thought and debate. Nothing more. Any decision you make to buy, sell, not buy, not sell, or do otherwise are yours and yours alone. You alone are responsible for the consequences of your actions. As always.

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