I’m seeing early signs that we could be headed towards an increased risk of a Bitcoin crash. But, if it happens, this crash will be about the crypto-tech startup ecosystem, not the currency’s price.

I’ve seen this movie before, during the Internet crash, and it reminded me that the single most important reason for that crash wasn’t its visible parts; i.e. high valuations, companies going public too early, average consumers losing money in the stock market, and VCs funding the wrong business models.

The single biggest spark that led to the above symptoms and started the Internet crash was simple:
Hyping the Internet and misunderstanding its impact by “rushing” the assumptions about its evolution.

Everything was going well during the early Internet years. Clear heads were prevailing until the media started to hype things in 1999. Around that time, I was an opinion columnist at Business 2.0, after I had written my second book, Opening Digital Markets (in 1997), a management-style book on Internet business strategies where I specifically avoided hype.

Then in September 1999, there was a turning moment with this Business 2.0 issue’s cover that symbolized the start of the Internet hype madness.

Business 2.0 was the standard bearer for the “New Economy” and widely read. That issue quoted a Forrester Research prediction that the B2B market would reach $1 Trillion in 2003, and basically was saying “all aboard”. Well…not so fast. They were right about that number, but off by 10 years for its realization.

So, basically that is what started the media hype around the Internet’s impact and the number of “billions of dollars in market size opportunities”. There was no realistic sense about how long it would take for all of it to actually happen.

Then, the snowball effect started. Amazon was being used a validation that all retail sales would be dead. Suddenly, the Internet was the answer to everything, from pet supplies to food delivery. In the B2B space, electronic marketplaces were supposed to replace every supply chain on earth, while “new” intermediaries were going to kill the bricks and mortar ones. And the list goes on with market size aberrations reaching billions and billions of dollars. Ignorance led to greed which led to misunderstandings, which led to a lot of money being poured too early, which led to a lot of people being hurt financially and psychologically.

Bitcoin and its incredibly rich crypto-tech ecosystem are facing a similar challenge, and could face the same fate, if we are not careful.

Yes, that was 2000, i.e. 15 years ago, but that was only 6 years after the browser was commercialized. Today, we’re entering 2015, about 6 years after Bitcoin was launched. OK, we haven’t had that irrational exuberance moment yet (except perhaps for a brief moment when the Bitcoin price reached $1,240 in December 2013), and I hope we never will, but we are entering a critical phase where germs for that hype are present in the system.

As exciting as it may be, Bitcoin and the Blockchain are *not* the answer to everything, at least not initially. And not all Bitcoin companies will be successful.

Let’s not get a false sense of security and confidence just because the amounts being invested in crypto-tech startups are smaller than in 1999. Remember, it was a lot more expensive to launch products in 1999 than it is today, perhaps X10 or more. So, when we see several seed deals at about $500K-$1.5M per round, that’s a lot of money. Today, these amounts enable teams of 5-8 engineers and designers to launch significant products, and with 12-18 months runway to comfortably do it.

With that historical analogy backdrop in mind, my warning is obvious. If we rush Bitcoin with hyperbolic promises, it will crash. And what will actually crash will be the companies that are getting funded today by money or sweat equities, and with their entrepreneurial dreams.

We could replace the word Internet by “crypto-tech”, and the same symptom we need to avoid applies today:
Hyping crypto-tech and misunderstanding its impact by “rushing” the assumptions about its evolution.

You might ask,- this is 2015, so aren’t we resilient and antifragile? Yes info-tech is resilient. Bitcoin is resilient, but the crypto-tech ecosystem around is not. It is frail, as I see it. It is subject to potentially succumb to its own version of a dotcom crash.

The Risks of Crowd-sales

At the heart of this increased risk is the self-booted, crypto-enabled, crowd-sale phenomenon which is gaining popularity. It is a powerful feature of the cryptocurrency platforms and protocols, but we should be careful in how we manipulate this type of an instrument.

The pre-mines, pre-sales and crowd-sales are just promises to deliver. Founders get money to develop stuff. This is like a big angel/seed round, but with no strings attached and loose diligence. These crowd-sales come with promises of self-accountability and transparency, but at much lower standards of scrutiny than in a traditional venture capital process.

The initial ramp-up often depends on how many people they can dupe into the crowd-sale itself.

Although some of these crowd-sales have shown some transparency, it is not near the required levels.

Many of the Distributed Autonomous Organizations, platforms and protocols are fairly theoretical at their inception. But will they work in reality? As I outlined previously, the operational framework around DAO’s must not be under-estimated. And there are no standards of reporting practices for DAO’s or early crowd-sales companies.

So, what can we do?

First, a few discipline-related principles to keep in mind.

Let’s not rush technology’s evolution to unrealistic levels
Let’s not promote hyperbolic predictions
Let’s not exaggerate on promises (every new protocol claims to be the “future” of something, to be better than all others, and to fix all the shortcomings of others, Bitcoin included- and they say that in the white paper, before a line of code is written or a single customer or user is acquired)
Let’s not talk without experience to backup claims
Let’s not be overconfident about landing on the moon when we have not reached the stratosphere yet
Let’s not confuse experimentations with product development

When you see actors in the ecosystem that want to rush it, call them on it.

When you see task forces discussing regulation, question them on it. (it’s still too early for that)

It makes no sense to raise $10 million to create a new protocol with marginal differences from the two dozen that already exist. At least not by taking public money. These are high risk adventures, and they should be funded by professional investors, not naive consumers.

Flippant predictions that Bitcoin will take over the financial system, its trading exchanges and banking infrastructure are just too hyperbolic and do not help its cause. And they certainly are to be dismissed when coming from people that knew nothing about banking or business two years prior.

I’m all for ideas. It’s good to have lots of ideas, but not all ideas are great. Bad ideas can kill you faster than good ideas will lift you. Bad ideas make us drunk and thirsty, as we clamor for their realization, but they can also cloud our thinking, and make us poor judges, especially as we pour good money and time after them.

I’m all for the magic of entrepreneurship and what determined entrepreneurs can accomplish when the odds are against them. I love that, but I also feel for entrepreneurs when their dreams are shattered because they were being mislead.

Experienced VCs are doing their diligence. But there is a lot of optimism everywhere, and that is worrisome.

If the average visible success rate for startups is 5%, then I don’t see why this would be different for crypto-tech startups. This means most of them will not succeed. That’s the nature of the beast, but we just need to keep that in mind.

How to Dampen the Risks

Startups

Don’t hype what you are doing; under-promise and over-deliver
Think about how you’ll get users and customers, not just how you’ll develop the technology
Educate and teach what you have learned to others; we need more crypto-tech developers

Investors

Don’t speculate
Do your diligence
Be inquisitive
Fund dreams, not lies

Consumers

Get educated
Ask questions
Follow others who have done diligence
If you have money, it doesn’t make you smart
Be patient before investing; we’re still passing the hors d’oeuvres

Media Editors and Writers

Don’t just publish anything
Mention other players in a given space when describing what a company does
Do comparisons, research and analysis
Investigate and check facts

Everybody

If it sounds unreal, or if there are more questions than answers, run away.
If the entrepreneur is dreaming of euphoria and quick gains, run away.
If it looks like a ponzi scheme, run away.
If you see slick presentations with 12 advisors and board members, and no product yet, run away.
If the company can’t explain their potential business model, or can’t articulate how different they are from other players, run away.
If they want to get funded before developing a line of code, run away.

Do we need experimentation and lots of investments in order to find gems and big ideas? Of course, we do.

Yes, many great ideas start by being ridiculed, (e.g. sleeping on someone’s couch, giving a ride to a stranger, publishing in 140 characters bursts, making an instant message disappear after it is received, and so on), but it takes some skills and hard work for the real things to emerge.

In business, there is typically 5 groups of actors: the professionals, the experienced, the amateurs, the ignorants (a nicer word would be “mis-informed”), and the charlatans (conscious or subconscious). They all want to be involved. Be aware of who you’re dealing with, and self-aware about who you are in this equation.

If you can’t recognize who is who, or which is which, then stay away. To make things more complicated, professionals could be technically strong, but also ignorant about business experience, so that makes them amateurs when you sum it up.

I’ve been studying and following Bitcoin and crypto-tech for the past 16 months, and I’ve been in the tech industry for over 30 years, and I barely pretend to be an expert, and only in certain parts of what is going on.

That said, I’m as excited as ever about applying crypto-technology to solve big issues and to create new opportunities for business, society and people everywhere; but given a choice, I would rather see us exceed delivery expectations than fall flat on our faces.

If we remain level headed, then Bitcoin, cryptocurrencies, Blockchain technologies and everything around them will change the world. That’s not a hyped statement, because I’m not putting a deadline on it. There will be some hard work ahead before it really happens.

Bitcoin is not a gold rush. There will be bread, gems and water for everybody…in due time.

An Operational Framework for Decentralized Autonomous Organizations

30 Comments

pointsnfigures February 7, 2015 at 1:07 pm

I think that one of the issues of bitcoin is product/market fit. It hasn’t found the killer use case yet-except save on fees. At this point, it’s a very promising technology. Companies going out of business might be good for the ecosystem because it will re-allocate skilled labor from losers to potential winners. It will hurt investors, but smart investors that know how to play the seed game will understand, and be better off.
William Mougayar February 7, 2015 at 1:22 pm

Well, I think Bitcoin has reached product-market fit as a platform and protocol for innovation, as it is sparking a ton of stuff around it, which it was supposed to do, but although I’m seeing a lot of good stuff, there is also stuff that is hair-raising (if I had any).
pointsnfigures February 7, 2015 at 1:28 pm

Depends on how you view product market fit. Is it changing behavior anywhere yet? Rapidly increasing transaction volume? Not clear to me. MoM volume might be deceiving. Better measure will be engagement.
William Mougayar February 7, 2015 at 1:32 pm

ah..ok. I was thinking as a “development platform”, it has.
As for the other use cases, you’re right. More work needs to be done.
pointsnfigures February 7, 2015 at 1:39 pm

i thought of one yesterday. What if you created your own alt-coin, and put the smallest unit of it on stock orders (like a Satoshi); and then posted all trades to a sidechain that integrated with the blockchain? Might eliminate the need for a clearing operation.
William Mougayar February 7, 2015 at 1:41 pm

Right. Blockchain as a transaction authenticator. It’s coming.
bsoist February 7, 2015 at 2:21 pm

Excellent!

https://twitter.com/xor/status/552119311947796480
Bobby Ong February 8, 2015 at 8:10 am

Excellent article, William. I was just having a somewhat similar conversation with a few friends in private recently and we thought the same thing. We think that there is too much VC money going into the ecosystem too rapidly. There is too much hype in this industry now and expectations that are already high on what blockchain technology can do is pushed even higher with VC money. I’m a firm believer that Bitcoin and blockchain technology will improve things but it may not come as immediate as many of us expect it to be.

Many Bitcoin projects are bleeding cash at a fast rate. Depending on bitcoin price in 12-18 months time, if Bitcoin price remains depressed, I think many of these firms will find it difficult to raise their next funding round. I reckon the larger startups will find it easier compared to the smaller ones to raise their next round because of a stronger team. As you pointed out $500k-1.5m seed deals can stretch far these days. You correctly also pointed out crowdsales funding and that is even more speculative in general with less oversight. I really wonder what will come to these project once the initial funds for founders salaries run out. Hopefully all will turn out well but only time can tell.
William Mougayar February 8, 2015 at 10:39 am

Actually, I don’t mind seeing a lot of VC money going into bitcoin-related startups. That’s good for the ecosystem, and typically VCs do their diligence.
But I was sounding the alarm bell more on the crowdsales that are going on, where there is little governance and reporting transparency. Some of these projects are carrying high expectations.
fredwilson February 8, 2015 at 1:39 pm

this post was the inspiration for my post this mornig

http://avc.com/2015/02/the-carlota-perez-framework/
William Mougayar February 8, 2015 at 2:20 pm

Thanks. Part of me is wishing for something bad to happen so we can learn from it.
There is too much optimism in certain circles.
Bobby Ong February 8, 2015 at 9:00 pm

Yup very true indeed. VCs definitely do their due deligience before investing. There are just so many crowdsales going around touting very high expectations of what the projects can come about. Very little governance and oversight on how crowdsale money is spent and managed. Your advice for the various parties are very sound indeed.
Guy Lepage February 8, 2015 at 9:10 pm

Great post..
awaldstein February 9, 2015 at 7:36 am

Excellent William.

Two thoughts…

While I agree with the premise over hype blaming the media is a tired argument is some ways. And one that doesn’t really hold anymore as the media itself is simply not that formative to the market.

And more interesting it sure may be easier to prototype a product/company but it is actually more capital intensive to build something at scale today than ever before as the thresholds for success are at astronomical levels to be economic.

Good piece.
William Mougayar February 9, 2015 at 3:02 pm

Thanks Arnold. I think in 1999, the impact of the media was greater because we didn’t have the multitude of bloggers that can shred to pieces anything that is exaggerated or inaccurate.
True that the scale difficulty is still there, and maybe even harder due to the increased noise levels.
awaldstein February 9, 2015 at 3:10 pm

The truth is that in the mid 90s into the late, for its last hurrah, the strongest force on the planet was distribution.

And at the point of sale there is not hype only transactions.

That is the greatest change in my opinion.
Stas Koval February 10, 2015 at 6:46 pm

It’s been a long time since I first thought that cryptocurrencies is a simple, convenient and quite obvious tool for crowdfunding and a way to obtain initial investment. This idea was implemented during my work and research on our video-interview service project. We’ve developed and issued our own cryptocurrency (RMS), equivalent to 10% of the shares of the future SaaS, and launched an ICO campaign on crypto exchange. Now I can say that we certainly failed ICO, having collected less than half of the required amount (AND lost some coins to BitCoin fall). But we continue to work on the project, implementing new services and solutions – also trying to draw more attention and keep the community informed about our progress
William Mougayar February 10, 2015 at 6:55 pm

Interesting project. Did you follow some of what was prescribed here by David Johnston? https://github.com/DavidJohnstonCEO

Curious to hear what you learned from that experience. Feel free to email me at wmougayar AT gmail. Thanks
Stas Koval February 10, 2015 at 7:17 pm

Thank you, William! No, we didn’t use prescriptions from D.Johnstorn repository, but it definetely looks promising and worth looking – thanks for sharing. I’d be glad to share my experience. Check out https://bitcointalk.org/index.php?topic=888714.0 for some tech info and RMS.
Scupper February 13, 2015 at 12:37 pm

This article is very much spot on. Many of the existing crypto-based business models show a lack of true business management skills. There are too many “technocrats” trying to capitalize on crypto-currencies without an understanding of how market dynamics work, as well as without an understanding of how “fiat” and crypto currencies must be seamlessly integrated. Too many business models emphasize the use of unstable crypto market valuations without incorporating stability elements, such as the use of a “fiat” currency. Moreover, when should be using the “Andorra” model when creating valuation stability in the business model (I created this expression). The “Andorra model” utilizes the weighted average of valuation of multiple strong fiat currencies to back the valuation of a cryptographic currency. In Andorra today, most bank accounts are valued with a basket of strong currencies, as opposed to being backed by a single national currency (such as the USD, CHF, EUR or GBP). Additionally, the underlying value of cryptographic currencies, lies in the facilitation of cross-border commerce, not national commerce. If a business person wishes to leverage the value of crypto, they should do so with the appreciation of globalization and the benefits global commerce has from a market development perspective. The only criticism I have of this article is that, the past tense of “to lead” is “led,” as well as the omission of a number of “articles” throughout the text. 😀
Clumpner_Archives February 13, 2015 at 2:10 pm

$380 MILLION Bitcoin scam on Hong Kong but index is still rising??

http://www.infiniteunknown.net/2015/02/11/bitcoin-386-million-allegedly-missing-as-investors-fear-bitcoin-ponzi/
William Mougayar February 13, 2015 at 2:21 pm

Apparently that had nothing to do with Bitcoin:
http://qz.com/342464/the-mycoin-scandal-in-hong-kong-had-very-little-to-do-with-actual-bitcoins/
William Mougayar February 13, 2015 at 2:25 pm

Thanks. I’ve just corrected the “led” thing.
Can you elaborate on “omission of a number of articles”?
Clumpner_Archives February 13, 2015 at 4:50 pm

AuContraire Mon Ami…
Much to do about SOMETHING.
Just because it doesn’t involve the Bitcoin Technicals!
http://www.coindesk.com/
Kevin Cazad February 13, 2015 at 6:04 pm

I love it, can the blockchain also cure the fact that I’m sober on a Friday and I wish I wasn’t?

-answer-

deepdotweb*
Akus Sells Mavro February 14, 2015 at 10:41 pm

I have read this article and I think bitCoins can be beneficial or greatly wasteful if mishandled. With that, I advise all of you to look at http://mmmglobal.org/?i=akus. This is MMM and we deal with bitcoins. It’s a network of global mutual help and when you help your fellow MMM member, your money will start accumulating interest at 30% a month. You can literally triple your money in 5 months. And since you help in bitcoins and get help from others in bitcoins, you will triple your bitcoin balance. Sign in, people all over the world are making money already.
digitizedcurrencynow February 16, 2015 at 1:04 pm

Regulation was mentioned only once – that’s forward thinking .
Ranjith Menon May 2, 2016 at 3:20 pm

#afofee Ranjith Menon +91 9145628198, call for the details and top positions in this superb concept.
ashraf khan May 16, 2016 at 11:21 am

Business Plan

Registration fees: 5 $

There are 2 incomes

1. Non-working Income

2. Working Income

4 Packages:

1. 50 $ USD

2. 100 $ USD

3. 250 $ USD

4. 500 $ USD

Non-working Income: NO TASK

2 Sessions in a week

One session is of 3 DAYS

Total 40 Session in 5.5 months

1st Session :- Starts MONDAY 12:01 AM

2nd Session :- Ends WEDNESDAY 11:59 PM

If User registration done in 1st Session than income starts from 2nd Session

If User registration done in 2nd Session than income starts from 1st Session

15 Days Locking Period

For Everyone Session 4.25 % income

4.25 % x 40 Sessions = 170 % Return Income

Working Income – PERFORM TASK

No Locking Period

1 day task = 0.5 % Income of the investment

0.5 % X 165 DAYS TASK = 82.5 % Return Income

No Task No income

Withdrawals

Per day Minimum withdrawal is $20 and Maximum is $300.

Timings – Tuesday 12:01 to Friday 11:59 only

Each account number can have only 1 withdrawal in a day,

THAT IS ;

1 account number = 1 withdrawal only Indian Account gets credited within 24 hours to 72 hours from the time a withdrawal request is given.

Withdrawals can also be done via Virtual Currency, this kind of withdrawals take up to 96 hours, from the time a withdrawal request is given.

Such transaction would need an OTP which would be sent to the registered mobile number ONLY.

Income sources

Referring Buddies – Each referral would add 5% as commission

Binary – On successful leg match binary of 8% would be received.

Salary option – Any person who works on committed, he/she are paid extra as salary. Minimum business expected for a person to be eligible for such salary is a monthly business of 750$.

Any revenue generated over and above $750 would build salary bonus, which would be 1% of the revenue generated above $750.

Thank You for your interest and time to understand how best we can associate and grow together.

say Afofee to smile
ashrafkhan7829149974 call or whatsapp
ashraf khan May 16, 2016 at 11:21 am

http://account.afofee.com/registration.aspx?ref=jHCubAB%2fYgPkm4YvB0RKcg%3d%3d

The Bitcoin Startup Ecosystem is Frail: Beware of the Next Crash