Build it and they will come - eventually
Bubbles are often thought of as bad things – certainly, when they inevitably burst, many are left holding bags of assets which often turn out to be worth very little, or nothing at all. The imagery of a bubble imploding is calamitous, but we would almost argue that the emergence and subsequent implosion of bubbles is an essential part of the cycle of growth as a civilisation.
Notwithstanding the mania and subsequent despair that bubbles cause, bubbles facilitate the suspension of disbelief and rationality in the deployment of capital, thereby allowing capital to be allocated to projects and ventures which would otherwise never have a chance of being funded. Our recent history would offer up plentiful examples: companies like Amazon, Salesforce and Tesla (to name a few in passing) which have pioneered business models involving long-drawn cash burn with the aim (or in Amazon’s case, the outcome) of establishing market dominance at scale could never have existed without the e-commerce/SaaS/Electric Vehicle bubbles brought about by more than a decade of easy monetary policy.
To that list we could add businesses that have become staples in everyday life for many: the likes of Uber, Airbnb, Grab, Gojek, Mercadolibre, Shopee etc. A few of these have attained sustainable profitability, others are still on their way, and whether the specific companies survive through the cycle is irrelevant: they have introduced new business models that will likely persist and/or form the basis of permanent changes in our way of life.
And if we think carefully about many things that one would consider “everyday”, from telecommunications lines and subsea fibre optic cables to national and transnational railways to fossil fuels, many of these were funded by the “excesses” of bubbles back in the day. In fact, a quick read of Wikipedia’s entry about the causes of the UK Railway Mania in the mid-1800s could be an apt description of the status quo if the word “railway” were replaced with whatever the subject of the bubble du jour is.
Would we be sitting here writing a draft of this post on Microsoft Word served as a SaaS subscription, on a fibre internet connection, serving out weekly newsletter online to a global audience, if it weren’t for a series of bubbles that brought the funding to what was an imaginary concept of the “internet” just over 20 years ago?
Probably not. Bubbles are good. Getting caught in them isn’t, but with the exception of perhaps tulips, hindsight would suggest their net outcome is rather positive.
As it happens, one could argue that we’re seeing the real-time bursting of our latest bubble.
Magic internet money
No, we’re not making any reference to the algo stablecoin of a similar name aka MIM, although for those who were paying attention to that particular saga, the hubris that predated its eventual downfall would have been recognised in the much bigger episode with Luna that followed.
Rather, it is the entire concept of crypto, this “magical” form of internet money that started with the anonymous Satoshi Nakamoto in the wake of 2008 that we refer to.
What started as a concept adopted by a small, niche community, gradually gained traction within a broader sphere, and ultimately captured the mainstream imagination in the depths of COVID-driven lockdowns globally, alongside generous fiscal and monetary stimulus directed at individuals. The reasons for the extent of traction in the mainstream are plenty, but as pointed out by several keen-eyed observers, a generational confluence of distrust in government, immense trust in technology as a force that could solve almost every problem in the world and a deep-seated desire of millennials to “catch-up” on the wealth ladder to the prior generation which controlled the bulk of the world’s wealth led a whole segment of society around the world, cooped up in their homes and funded with stimulus cheques, to make the most asymmetrical, convex trades they could find.
It was YOLO on steroids: from single stock call options in meme stocks like GME and AMC (“stick it to the hedge funds!”) to even Tesla (“and stick it to these Wall Street analysts too!”), to all-in bets on dog coins of different sorts, to alternative chains and a plethora of DeFi projects. Whatever the establishment didn’t touch but was going up, that was a chance to get rich fast and get that trading account balance up.
Eventually that “retail” impulse, funded by what seemed for a while to be an infinite source of new capital, tipped what started as a bit of irrational exuberance within a niche minority of crypto “degens” into the mainstream narrative. Everyone wanted to be a part of it, to the point where even “traditional” managers who had spurned and denounced crypto in prior years as an instrument of crime, the dark web, drug dealing, money laundering, child smuggling and all manners of heinous misdeeds started to jump on board.
Magic internet money wasn’t just a meme anymore – and that was when the bubble really got going. DeFi became DeFi 2.0; a new breed of Ethereum killers emerged (alongside some of the old breed that managed to survive through the previous crypto winter); and Play to Earn became Play AND Earn and the Metaverse – all of this so quickly that it was rather evident to us late last year that things had gone a bit out of hand.
This time is (not) different
As far as famous last words go, these remain as true for those who refuse to accept that a bubble has burst as they do for those who refuse to accept that the very same bubble they had cleverly avoided potentially forms the basis of the next generation of transformative disruption.
When? Certainly not immediately, but soon™.
If we were to just step back and take stock of the scale of capital, both financial and intellectual, that flowed into crypto these past years and the kinds of inventions and innovations it has brought about, the list turns out to be rather impressive: from trustless payment systems to decentralised computing; from decentralised finance in various forms to variations on achieving trustless consensus across anonymous, non-coordinated nodes; from self-sovereign ownership of gaming assets to novel approaches to intellectual property licensing under creative commons licensing at the highest echelons of marketing and brand development; from the recognition of decentralised, globally governed entities to the establishment of legal structures that support the existence of these organisations; from the application of what started as randomly bred crypto cats into technologies that manage ticketing, communities, membership, physical attendance and other forms of media.
Just as many decried the arguably irrational (at the time, at least) deployment of internet infrastructure in the form of submarine fibre optic cables, first around the dotcom bubble and then as the e-commerce/web 2.0 thematic got into full swing in the middle of the past decade, it is precisely because of that infrastructure put into the ground that we are able to enjoy what we have today.
A lot of this investment was made in the irrational hope that the demand would eventually come – many companies went bust in the process, but the infrastructure remained. Over time, demand did indeed grow into that capacity – and more.
So too is it likely to be the case with crypto: the learnings and technological development that has taken place over the past few years will not be unlearnt. The companies and entities that brought about these developments, technological or otherwise, may or may not be the champions of the future. After all, in tech, first doesn’t always come out the eventual winner. In fact, one could argue that the battle for even the “old” internet is still being waged.
But the learnings remain. It is a cliché on crypto twitter to mock those who are “in it for the tech”, who hold on vehemently to their beliefs that their particular favourite project is “the one”. The criticism is not wrong, but arguably, if we didn’t have enough people who were “in it for the tech”, none of the tech would ever be built.
Suspension of disbelief is critical for these otherwise unimaginable leaps to be made.
Winter is here
The fallout from the Luna/Terra episode which involved many who were not necessarily “crypto native” is likely to cause widespread PTSD: one can imagine the criticisms that will come, including the terms “ponzi” and “scam”.
Unfortunately, these labels will ring true for some segment of the industry. For others, having a business (if there even is a business model at all) that is a going concern will be THE main issue to deal with. Surviving a crypto winter is going to be challenging for everyone – and this one, given the extent of the PTSD from the current shock, might be more damaging.
Now that the euphoria is gone, along with the proverbial tide of irrationally exuberant liquidity, we all have the chance to see who’s swimming naked – and who isn’t. Could there be more downside risk? Definitely. The winners of the future may not even be evident right now – who would’ve thought that Yahoo would fade into obscurity, back in the day when Yahoo was THE de facto search and news portal? And who would’ve thought Google would rise to the dominance it has now?
Nothing ventured, nothing gained. There are no secret formulae that guarantee a return anywhere, other than hard work, a bit of imagination and some appetite for risk.
With those in hand, the desolation and despair of a bear market is where dispersion can start to occur, and the wheat can be separated from the chaff. Across the board, those crypto businesses that made hay while the sun shone, including the likes of Coinbase, FTX and Binance are now reaching deep into those cash reserves to hire talent and even build new businesses in the wake of the shakeout.
They too have had their mark downs in an environment of fear, uncertainty and doubt: about whether for all the building they’re doing, the demand will come.
And that’s where it boils down to a matter of opinion.
We’d tend to think that after a deep, rough winter, the spring can be a rather splendid one – for those who make it through, at least.