A single crypto regulator to appear in the EU Hotels in Maldives and Thailand accept crypto payments PayPal added bitcoin support to its mobile app Corporations invested more than $6 billion in crypto industry in the last 10 months DeFi-platform Velodrome accuses crypto sleuth of stealing $350k S&P Global dropped Coinbase rating to a speculative level BitGo will seek $100 million for Galaxy Digital refusal to acquire crypto platform Brazilian crypto exchange blocked customer accounts and fired staff Celsius Network’s debts is more his assets for $2,8 billion

Hoping for the best, prepared for the worst: why the crypto industry crisis is inevitable and what the Dot-com bubble has to do with it

Hoping for the best, prepared for the worst: why the crypto industry crisis is inevitable and what the Dot-com bubble has to do with it

In recent years, the crypto industry has shown enormous growth. In less than a week, we can read news on another fund or project that has raised millions of dollars. It makes me feel positive since the crypto sector will drive us to Web 3.0, transforming the Internet for the better (my personal expectation is that there will be fewer ads in the future). However, being well-versed in economics and history, I believe that this path won't be easy since the crypto industry will soon face a global crisis.

Editorial note: This article does not represent the opinion of the entire Kravox.com editorial staff. However, we found this article worth your time to read it and form your own conclusions. In case you want to share an original vision of the crypto industry development or a specific project, contact us via e-mail: info@kravox.com

I always felt passionate about studying crises: what happens before they happen, how they happen, and what happens after they occur. When you do such things quite often, you soon start to see more and more similar factors. Still, crises occur at different times in different countries, and thus, many people believe that each new crisis is unique. I partly agree with such a view, but I also think that the underlying causes of many economic crises are almost identical. 

Recently, I decided to compare the Dot-com bubble with the evolution of the crypto sector. The facts I found were so interesting that I decided to share them with you. I won't provide specific figures or formulas here because many people will fall asleep. I will simply compare two events: the Dot-com bubble and the current development of the crypto industry, letting you draw up conclusions.  

Beginning

Dot-com bubble: 

The Dot-com era began in 1993 when the first release of the Mosaic browser occurred. More and more people were acquiring computers for their homes, starting to master the mysterious technology of the Internet. The world was exulting with freedom of speech, the destruction of borders between countries, globalization, and so much more. 

Shares of online companies started going up. The new technology was popularized so much that it triggered the emergence of hundreds of new companies that easily attracted investors, entered the stock market, and actively increased capitalization. That was the time when such giants as Amazon (1994) and eBay (1995) emerged. It seemed that the Internet would increase any company's revenues many times over. Even big businesses fell into temptation, starting to incorporate the Internet into their business processes.  

Crypto industry:

But the beginning of the crypto industry era can be considered January 2009, when Bitcoin was released for the first time (although the principles and the protocol became known a little earlier, back in 2008). Blockchain and the world's first cryptocurrency rapidly gained popularity; according to a report released by researchers at Cambridge University, 8.2 million bitcoin wallets were created between 2009 and 2013. And by 2016, that number had quadrupled to 35 million.   

Bitcoin's rate growth was matched by the growth of other crypto projects, such as new digital coins, wallets, exchanges, and other services. The rate increased even despite government and institutional criticism, the economic forum in Davos in 2017. Occasional government attempts at banning or regulating the new market caused only a slight setback. Today, the total capitalization of the crypto industry is worth $3 trillion, and most governments are already seeking ways to regulate the industry rather than ban it.  

Underlying causes

Dot-com bubble: 

A close look over that period reveals a concept substitution and the overall exultation and new technology development. Initially, the Internet was seen as a tool to implement a business process, further boosting its growth. As an example, we can mention Amazon. Before it emerged, there was already an entire product sales industry via TV or catalogs with subsequent postal delivery. Yet, the Internet has only improved that by automating many processes (ordering and payment procedures, updating product information, logistics) and providing more cost-effectively and quickly information to customers. One more example would be eBay. There were auctions before eBay as well, but ordinary people couldn't hold them since the costs were too high. The Internet changed that by reducing the cost of auctions for individuals many times over. 

However, later on, instead of treating the Internet as a tool, people started to consider it a business process itself, generating income from the invested capital. So, everyone began to make use of it. What's the point of looking for business and community problems offering Internet-based solutions when you can simply state that your website will bring profits to anyone who invests in it? In this way, different variations of the Ponzi scheme were introduced on a mass scale. It worked up to a certain point. 

Why did the substitution occur? Well, it's hard to answer this question, but in my opinion, it was because of the information oversimplification. Common people watched Internet companies grow and tried to make money out of it. But they didn't study how it works, what are the risks involved... So, they just started to follow simple guidelines, which boiled down to "Don't ask and give me your money." 

Crypto industry:

Could anyone in the '90s ever have imagined a soon-to-be Facebook, Youtube, and Reddit? I don't think so. The same applies to another new technology, Blockchain. Except for grasping its potential, no one really realizes all of its possibilities. However, we can already see at least a few main areas that will be actively developed:

  • Cryptocurrency. Many "real economists" are trying to prove that all cryptocurrencies are just fiction, a fraud. That nothing is backing them. Well, I agree with them. Still, they just have never considered the CONVENIENCE of cryptocurrencies. When a company transfers money from the US to Germany, along with the e-transfer, there is also a transfer of paper money. The same paper money goes to exchangers, ATMs, and other places where you can exchange electronic money for paper. Meanwhile, it is necessary to print them, replace damaged banknotes with new ones, ensure their delivery, etc. All of this causes huge losses, both in terms of time and money. Cryptocurrencies are free of these drawbacks. What remains is the question of trust in digital money. The answer is quite simple, and China has already proved it: they have created their own digital coin, DCEP, backing it with their economy. 
  • Automation. Blockchain and smart contracts allow the automation of many processes, ranging from voting procedures in elections to shipping goods to logistics centers. 
  • Decentralization. It serves to protect against cyber-attacks and loss of digital assets. However, so far, it is relevant only for large companies and financial institutions, where data loss is fatal. 

However, despite the enormous potential, the crypto industry has been facing emerging problems:

  • Poorly performing projects. Perhaps, this is the most common type of project. Various teams offer totally ineffective solutions to the problems or challenges of a business or community. As an example, various NFT collections which entitle you to own a digital copy, but do not entitle you to actually own the thing. Many people fall for it, partly because they do not understand things, and partly because of the desire to make money on silly users before the value of a certain NFT collapses   
  • Projects with fictitious efficiency. Such companies are also numerous, but not everyone can recognize them. Here is an example. Goldfinch is a cryptocurrency lending platform that offers cryptocurrency loans to anyone around the world, but without cryptocurrency collateral (as other lending platforms do). People give the money for the loans themselves, getting their percentage in return. What's the catch? The company requires real estate collateral. This poses two questions at once: to whom will the collateral be assigned? And how is the company going to sign a collateral agreement with a borrower from another country? The answer to the first question is quite easy, because the collateral will be assigned to the company.  So, it turns out that all creditors must trust the company that in case of default it will sell the collateral and distribute it to creditors. But the second question has a trap: if the company is registered in the USA, what prevents a resident of France or China or South Africa from signing a collateral agreement and then not fulfilling it? No court would recognize a piece of paper from an American company, since it does not have a license to provide financial services. In order to solve this issue, the company will need to open branches all over the world and obtain licenses, which means huge expenses and competition with ordinary banks and credit institutions (except for one small feature - the company will disburse money in cryptocurrency with high volatility). So, it turns out that the company appears to be doing useful business, but in fact it is a flop.   
  • Ponzi scheme projects. There are a lot of them, too. Today, more than half of the projects in GameFi are based on it. The idea is very simple, which is to create a game with in-game currency, and to withdraw it into real currency. But first, in order to get it, you have to develop your character. Still, to quickly level up your character, you need to buy in-game currency for real money. If you level up your character for free, it will take too much time. Therefore, smart gamers buy in-game currency for real money, improve their characters, and then proceed to withdraw money from the game. The point is that you can withdraw only the money that was previously deposited by other players. The more popular the game is, and the earlier you start playing it, the more you'll withdraw. But for the remaining players, there will be no more money. Meanwhile, the company also earns on transactions. As an example, we can mention Mir4 (at least, it has great graphics, many games do not bother with the plot or graphics). 
  • Financial projects. Crypto exchanges and DeFi services are pretty good. However, one very dangerous trend is that they are starting to launch tokenized stock trading. The idea is simple, a token is created that is linked to a company's stock (a kind of stablecoin). So, what's the danger? The risk is that you are not buying a share like on a regular stock exchange, but only a digital signature for it, which (!) is not regulated by law. In other words, in the event of a collapse of the company's stock or the stock exchange, it would be profitable to just keep your money and not try to reimburse it. And no court will help you. The second danger is the inflating of the token market based on the stock market. This is how it works: 10 different exchanges create 10 tokens per company share. If a company goes bankrupt, not only the owner of that stock goes bankrupt, but also 10 other token holders of that stock. By the way, anyone who saw The Big Short movie about the 2008 mortgage crisis in the U.S. will probably remember about synthetic CDOs. So, tokenized stocks are synthetic CDOs. So, the conclusions are up to you. 

It is also worth noting that exchanges do not create or produce anything. Therefore, they exist only as long as there is demand for trade. But in times of crisis, this demand falls sharply. The owners of stock exchanges realize this, so they are actively investing investors' money in other projects. 

Conclusions

Dot-com bubble: 

The bubble burst on March 10, 2000, when the NASDAQ Composite Index fell, even though it had doubled its annual total. Along with the fall, most Internet companies went bankrupt. Some of them were liquidated or sold. Some CEOs were even convicted of fraud and embezzlement. Even major players, such as WorldCom and NorthPoint Communications, were affected, and now you won't even remember them anymore. This happened because most of the business models were not focused on improving or creating business processes, but only on advertising campaigns and attracting more investors.    

Crypto industry:

To avoid sounding proofless, let's just calculate how many poorly performing there are in the crypto industry? And how many projects have false efficiencies? Given the Ponzi schemes, which exchanges have already started to create tokenized shares? And finally, look at how much investor money is invested in real business processes and how much in advertising? 

According to my personal calculations, the ratio of good or at least neutral (this includes crypto exchanges) to outright bad crypto projects is 15% to 75%. Of course, you can try to analyze active crypto projects on your own and calculate your own ratio, but I am sure that even there will be more than 50% of bad projects. This means that the crisis in this industry is a matter of time. As much as I don't want otherwise… 

But there is good news. Post-crisis companies will remain in the market, becoming the backbone of the entire crypto industry in the future. 

Tom Redford

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