• by William Mougayar
    Venture advisor, 4x entrepreneur, marketer & strategist. I live in Toronto, curate a lot, blog a bit, and help startups.

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

shutterstock_250072342I’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


  • 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


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


  • 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


  • 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.

  1. pointsnfigures

    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.

  2. William Mougayar

    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).

  3. pointsnfigures

    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.

  4. William Mougayar

    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.

  5. pointsnfigures

    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.

  6. William Mougayar

    Right. Blockchain as a transaction authenticator. It’s coming.

  7. bsoist
  8. Bobby Ong

    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.

  9. William Mougayar

    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.

  10. fredwilson

    this post was the inspiration for my post this mornig


  11. William Mougayar

    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.

  12. Bobby Ong

    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.

  13. Guy Lepage

    Great post..

  14. awaldstein

    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.

  15. William Mougayar

    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.

  16. awaldstein

    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.

  17. Stas Koval

    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

  18. William Mougayar

    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

  19. Stas Koval

    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.

  20. Scupper

    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. 😀

  21. Clumpner_Archives
  22. William Mougayar
  23. William Mougayar

    Thanks. I’ve just corrected the “led” thing.
    Can you elaborate on “omission of a number of articles”?

  24. Clumpner_Archives

    AuContraire Mon Ami…
    Much to do about SOMETHING.
    Just because it doesn’t involve the Bitcoin Technicals!

  25. Kevin Cazad

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



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    Regulation was mentioned only once – that’s forward thinking .

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