Crypto economy, the invisible forces

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Crypto economy, the invisible forces

Friday, 23 February 2018 | Arifa Khan

Why the powerful are at war with crypto

The history of crypto currencies is fraught with thrill, danger, and high octane drama. Billions are being lost and made each day, and Fortune just found a new job of counting the newly minted crypto millionaires, as their crypto wealth is not virtual anymore. As it were, the demand and supply dynamics of crypto economy would confound a traditional economist, just as ‘network effects’ of platforms would elude the comprehension of revered valuation specialists and VCs of the DCF era.

Crypto economy which was valued at around $20 billion at the end of 2016, ballooned close to $800 billion by the end of 2017! This is still in the leagues of Apple’s valuation and a fraction of what constitutes entire $in circulation ($1.2 trillion) or the world’s mined gold ($8 trillion). Understandably, the fiat-wealthy are getting concerned about the rising influence of the crypto affluent.

This is a war for high stakes where incumbents have

Hegemony, over printing and circulation of money; Oligopoly, by institutions that are gatekeepers; Huge barriers to entry and High profitability due to limited competition. In a clash of fiat and crypto worlds, what moves are deciding the fate of these hyper volatile assetsIJ

Supply: The supply of Bitcoin, and crypto currencies is neither controlled nor influenced by the traditional gate-keepers, governments, regulators, central banks or the incumbent financial institutions. They were late to the party, so they have no coins to control the market with traditional supply curve economics. 

Over 90 per cent of crypto holdings are concentrated in the hands of less than 10 per cent owners, who are made up of crypto founders, early adopters, and server farms of a few mining conglomerates — none of whom have sizeable overlaps with the traditional fiat-wealthy! This, though ironic for an economy that revolves around decentralisation, is characteristic of any disruptive new technology where the early disrupters gain hugely at the cost of incumbents who don’t adapt.

Also, the supply of crypto coins is capped naturally by the scarce developer talent available to build projects, even if some of the challenging roadblocks such as scaling, performance and security are  being gradually overcome to lure more innovators in its fold.

Demand: Demand for newly minted crypto coins is under-served and price inelastic, which explains the huge appreciation in crypto prices during and after listing. Thanks to crypto’s dizzying returns, mainstream investors and speculators are thronging to diversify their asset holdings into crypto. This is worrisome to conservative economists and governments who fear this may be a bubble, whilst traditional VCs gripped by FOMO are rushing to launch crypto funds.

ICOs are generating huge returns because demand for tokens far outstrips supply, even before a token’s utility is established. The crypto-faithful have been pouring money because they want to nurture this new eco-system, and believe this is a nascent stage of an explosive economy whose potential is yet to be tapped. Incumbents, to their dismay, are realising they cannot control the supply and demand of crypto — other than through regulation. Some are attempting to compete with their own minted coins, like Ripple. Others are brazenly forking existing coins and creating new market valuations out of thin air. Forked coins comprised over $40 billion of the market in 2017, compared to $5.5 billion raised by ICOs!

Governments, Regulation & Competition: Many Central Banks have embarked on crypto currency projects, however couldn’t resist falling prey to their old ways - of centrally controlled issuance — at odds with the very philosophy of crypto. Russia, Japan (J-Coin), Sweden (E-krona), Estonia (Estcoin), UK. Uruguay, Kazakhstan, China — all guilty of poor imitation. The very premise of a crypto currency is its decentralised issuance or supply, which is algorithm-driven and resistant to arbitrary interventions in supply and demand.

A centrally issued coin is no different from any gangster or Superstar issuing his own token with his name on it, nothing to do with being a cryptocurrency. Such coins which are detached from blockchains and lacking in crypto economic incentives, are vulnerable to price manipulation by controlling parties with vested interests. Such coins offer no network effects of users, no promise of future applications to be built on top of such platforms — to boost their valuation, and are purely driven by greed and market manipulation. Blockchains and real Cryptocurrencies go hand in hand. It is clueless policy makers that say ‘hail blockchain, shun crypto’!

The crypto economy is still nascent with many unsolved problems, but it is evolving at a rapid pace with dozens of innovative protocols mushrooming every month. The billions of dollars lost in crypto heists, hacks and unknown attacks have not abated the feverish excitement, but in a perverse way only further stoked it!

Everyone is just waking up to the fact that there is more to crypto than the bitcoin you hold in your wallet. If you have stakes to guard as an entrenched intermediary, maybe crypto just takes direct aim at that. If you are paying merely a lip service to democratic principles, crypto may be the ultimate messiah for civilians whose liberty is at stake.

An Aladdin’s genie is to transform a powerless citizen to an empowered participant of a self-governing society. True to its name, there is more to crypto than meets the eye! Are we ready for crypto 3.0IJ

(The author is India Partner of Ethereum & a crypto pioneer. She is currently heading a project to build a tokenised IPO platform and a global borderless exchange for entrepreneurs everywhere that want to raise capital, without the need for investment banks)

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