In the past month, I’ve driven over 2943km, or 1828 miles, attending conferences and talking to people about Cryptocurrencies.  What I hear is an obvious feeling of fear amongst the general public, but that wasn’t always the case.  One of my Airbnb hosts in The Netherlands had told me that towards the end of last year, during the massive rise in prices, everyone was talking about crypto; and rightly so.  People tend only to discover things when it is too late, or when they think they can make a quick buck.  It was at that time that anyone and everyone was buying at least a little bit of crypto, but many had no clue what they were buying.  They were buying the hype.

 

After the downfall in prices, those same people who wished it was cheaper and were raving to get into crypto are now silent.  This silence is a double-edged sword as the market waits for a full recovery, but people are too scared to top up their positions or get in for the first time after seeing friends or themselves with diminishing balances.

 

The market itself is still young, and the more traditional markets are not without their wild fluctuations in the beginning.  Let’s rewind time for a bit and go back to the invention of the stock market.  Back when traders would meet in the coffee shops of London and swap shares in shipping companies in the hopes of making some profit from a new and booming industry.  Sound familiar?

The Restoration Coffee House, London (1668), a popular place for “coffee house politicians” to air grievances. Photograph: Lordprice Collection/Alamy

The South Sea bubble which developed during this time has many correlations to the crypto market.

It all started with The British East India Company [1] which had one of the biggest monopolies in history.  At its peak, the company could account for half of the world’s trade in commodities like spices and tea.

When investors began to receive massive dividends and cash out their shares for fortunes, others jumped in for a piece of the action. This trading market came to fruition so quickly that were no rules or regulations for the issuing of shares.  Others took notice of this success, and The South Sea Company was founded in 1711 with a guaranteed interest rate of six percent.   With a similar charter to the already successful British East India Company; its shares, and the multiple re-issues, sold as soon as they were listed.  The first ship hadn’t even left the harbor.  The company did, however, use some of the funds to open lavish offices in the best parts of London.

1754 engraving of Old South Sea House, the headquarters of the South Sea Company, burned down in 1826, on the corner of Bishopsgate Street and Threadneedle Street in the City of London

Before we continue, I’m sure you’ve already made several correlations between the crypto market and what was happening in England and other parts of the world during this time.  Even the most successful and well-managed cryptos began without a product, often without a single line of code ever written.  The hype, just as with the shipping industry when it first developed, was enough to invest.  People are looking for the next Bitcoin or Ethereum.  Just like those who were looking for the next British East India Company.

 

Encouraged by the “success” of The South Seas Company and realizing that the company hadn’t done a thing except for issue shares, collect money, and open posh offices; other “businessmen” rushed in to offer new shares in their ventures. Some of these were as ludicrous as reclaiming the sunshine from vegetables or, better yet, a company promising investors shares in a company so unique that its product was unknown.  Just like the scam coins we see being released every single day into the marketplace.

When you place the charts of the shipping company next to the chart of Bitcoin we see an obvious relation.  The peak of hype happens within a very short period and then almost immediately retreats.  For the South Sea Company, this period happened between January 1720 and August of the same year.  The shares rose in price from just 128.5 to over 1000.


 

Price of Bitcoin between 10.2017 – 02.2018

 

 

Inevitably, the price collapsed when the company failed to pay any dividends on what little profits it did have.  Unexpected taxes forced it to only be able to make one trip per year.  It was a massive failure.  Amongst the rubble was born The Bubble Act of 1720[3] which banned the issue of transferable shares without incorporation. That meant that companies issuing shares that were operating without a royal charter or an act of incorporation passed by parliament were illegal.  These charters and acts were difficult to obtain.  In simple terms, the limited liability company was born.  You could no longer issue shares without first being incorporated, which required government permission.

 

Sound familiar with the current situation for ICOs?  At the very beginning, it was extremely simple.  Anyone could push a smart contract to the network and create a token to sell.  You still can.  But now, if you’re not just creating a token but raising money with it, you’ll not only be incorporated but following KYC and AML procedures as well.

 

The overall problem for crypto lies in the same realm as the shipping company.  There was no real meaning behind the shares.  It was simply a crowdfunded company with fancy offices in London that didn’t do much shipping.  They were buying the hype without a solid business already in the market.  This does not mean that the crypto market, in general, will fail or even some of the projects which are down heavily in value will either.  We must bridge the gap between hype and an actual product.  Which brings me to Metcalfe’s Law.

 

Figure 1, Source: https://doi.ieeecomputersociety.org

 

Metcalfe’s Law is named after Robert Metcalfe, inventor of the Ethernet, and states that the value of a network goes up along with its usage.  Especially once a point of critical mass has occurred, this growth begins to grow exponentially.  Facebook is a great example of this.  You can see that the actual revenue and growth figures when plotted next to Metcalfe’s law projections they are on nearly identical trajectories.

Figure 2, Source: https://doi.ieeecomputersociety.org

For many cryptos, we have not yet reached this point of critical mass.  Ethereum and Bitcoin are well on their way with their more established networks.  Newer tokens, however, like Bounty0x, BitDegree, Dorado and even EOS still need to prove themselves to make it to the next growth face in value.  The initial hype of release and promises gave us the first run of profits last year.  We have now entered the phase of low speculation and emerging utility.  This vital phase relies on us.  We have to use these new markets ourselves and tell others to try it out if we want them to succeed.

 

So if you’re holding BitDegree and asking yourself when it will go up, ask instead have you tried one of their courses?

 

If you’re holding KyberNetwork, have you made a trade there yet?

 

Even SpankChain has a beta you can try.

 

The more we use the projects we liked so much we invested in them, and the more people we tell about it who also try it, the more successful that project, and the entire industry will be.  The way for us to bridge the gap between hype and real value, is to stop focusing on the tokens and focus on the projects.  The tokens mean nothing without a project or network behind it.  These things take time to build and require feedback to get right.  Go out there and use what you hold, tell them about bugs you find and tell your friends to check it out.

The only way up is together!


If you found this topic interesting I recommend watching Kary Bheemaiah’s talk from this years The Next Web Conference in Amsterdam, Netherlands.  His talk on “Measuring The Intrinsic Value of a Token” was one of the best I heard there.

Sources:

[1] https://www.britannica.com/topic/East-India-Company

[2] https://www.britannica.com/event/South-Sea-Bubble

[3] Freeman, M., Pearson, R., and Taylor, J. (2013) Law, politics and the
governance of English and Scottish joint-stock companies 1600-1850.
Business History, 55 (4). ISSN 0007-6791

 

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