There are numerous reasons why the market is punishing crypto, and more specifically utility tokens.
Below are some of the major factors which have led to the crash.
Flawed Business Concepts:
While there are some valid projects in the space such as Factom, and Stellar, most projects are either outright frauds, or at the very least, awful business concepts.
I’ve been contacted at least twenty times by different projects who plan on being ‘Uber on the blockchain’. In this case the business model features paying drivers in cryptocurrency so that they can cut out the middle-men.
I initially inform these Uber clones that General Motors, Tesla, Uber, and Lyft are all planning on releasing autonomous vehicles within 5 years. Afterwards, I proceed to ask how they plan on tackling this challenge. Generally, they have no answer. In other words, they plan on disrupting Uber by paying drivers in crypto, while Uber are busy disrupting themselves by removing drivers.
Another example are projects which advertise themselves as ‘AirBNB on the blockchain’. Ask how they plan on marketing and they have no idea. They somehow expect the average consumer to want to purchase bitcoin, transfer the bitcoin to an exchange, purchase the companies token, and then transfer that token to the ‘AirBNB clone platform’.
This is not user friendly to simply book a holiday. If you ask these companies how they will monetize, often it involves the value of their tokens increasing. A sloppy business with no actual business plan, one example of this are Bee Tokens.
Nowhere do these ICOs validate how they will market the product, or how they plan on earning money. The reason is that 90% of these companies have no intention of earning money from the business, they only look at raising money from the ICO.
The same could be applied to dozens of other verticals which ICOs claim to disrupt such as advertising, affiliate marketing, data storage, esports, healthcare, etc.
While there will be some bad businesses conducting STOs the numbers will be reduced. Institutional investors will be more demanding, and the added regulatory environment helps ensure that STOs are more transparent.
There are 2 types of businesses that raise money from ICOs. The fraudulent ones which have the goal of raising money and hyping the product, and regular start-ups.
Start-ups operate on a tight budget, they carefully measure the burn-rate, and attempt to stretch raised capital as much as possible. Funds are used on payroll, rent, and other operating expenses. They cannot afford to pay 40 BTC to list on HitBTC, or up to $3,000,000 to list on Binance.
Meanwhile fraud projects ‘invest’ raised funds into listing fees. The ICO reserves some of the raised capital for marketing, and the rest is kept as profit for important assets such as ‘lambos’.
Who does the market reward?
Often, the market rewards the fraudulent companies which can afford to pay exorbitant listing fees. The success of an ICO is dependent on marketing and hype instead of actual product adoption or market penetration.
Exchanges should be profiting from trading, not from listing fees. Credit should be given to Bittrex for being one of the few exchanges with no fees. Legitimate security exchanges will not charge anything more than basic listing fees, ensuring an even playing ground for legitimate businesses.
The theory is that forks are evolution, there’s a disagreement between management, and both parties go their own way to then ‘fork’ the code. The best fork then wins.
While there is some validity to this theory it causes numerous issues as outlined:
- Market Confusion – The average consumer considers purchasing bitcoin. Now they must somehow learn to differentiate between the various versions which include: Bitcoin Gold, Bitcoin Diamond, Bitcoin Dark, Bitcoin Cash ABC, Bitcoin Cash SV, Bitcoin Private, and Bitcoin.
- Dilution of Brand – If there were 15 versions of Apple products by 15 different companies named Apple, it would dilute the value of the brand. The same applies to Bitcoin or any other fork. The more forks, the more the value will decrease. The worst thing that happened to Bitcoin was Bitcoin Cash.
- Magic Money – The entire concept of Bitcoin is that there’s a maximum limit of 21 million coins. Every fork then teaches the market that this maximum limit is arbitrary, as you can keep on ‘forking’ or duplicating this 21 million into infinity. It destroys the limited supply concept.
Digital securities cannot be forked, this ensures the integrity of the brand and removes market confusion.
There are two problems with Bitcoin being as volatile as it is currently is.
- When the price begins to crash, merchants do not want to accept it. Some industries are super competitive with tight profit margins, they cannot afford the risk of accepting Bitcoin unless it’s converted immediately to fiat.
- When the price escalates as it did in December 2017/January 2018 the opposite problem occurs. Consumers do not wish to spend Bitcoin as they know they are losing money, instead this price escalating causes hoarding behavior.
Both above problems cause market friction and deter user adoption. Stable Coins which were the first true security tokens can solve this issue.
Hacking and User Error:
Using cryptocurrencies is difficult and unforgiving. It requires storing private keys, hoping that the keys are never compromised, and that the user will never make an error. It requires humans to be perfect and to behave like machines.
The average person does not want to be stressed out by losing private keys. This alienates anyone who is not tech savvy and who does not live and breathe crypto.
Cryptocurrencies are an area of vulnerability for merchants. They know that if the funds are hacked, they can never be recovered. This begs the question, why would they bother with the risk? It’s one thing to worry that a bad staff member might empty out a cash register for $500, it’s something else to worry about them stealing 1000 BTC.
This same problem is why institutions are not wanting to invest in crypto. When you are dealing with a billion dollars in volume, the last thing that you need to worry about is a potential $200 million heist.
I do not foresee any type of real market adoption for any token unless it has some type of KYC baked into it.
Security tokens solve this problem, they have KYC baked into the token which means if the token is stolen, that compromised token can then be destroyed, with a new token being reissued to the rightful owner. This simple feature solves the issue of hacking, lost private keys, etc.
Institutional money has seen the writing on the wall when it comes to utility tokens for many months now. They have reduced exposure to these assets to focus on tokenized securities. This has further driven down the price of most utility tokens.
While it is undeniable that there are many issues outside of the 5 that I have highlighted, I believe that these are some of the fundamental problems which have led to the market crash. Digital securities in the form of security tokens will be the next wave of crypto.