Over the past few months, I've written several articles on blockchain as well as cryptocurrencies, their impact on entrepreneurs (including celebrity investors) as well as society as a whole.
And a recent article in Bloomberg said it best, "The problem with bitcoin and other so-called digital currencies is that they're a misuse of this technology." Simply put, the hype is reaching a point of frenzy as speculative investors look to cash in on initial coin offerings (ICOs). Beyond the hype, however, is an underlying technology that will most certainly impact our lives for years to come.
Understanding the Blockchain Bubble
I had the pleasure of speaking with CMO John Licata and Creative Content and Design Lead Mustafa Inamullah from MIMIR Blockchain Solutions who shared some interesting insights around today's blockchain bubble and the lasting impact of previous technology bubbles. I share all of this with you because there are some great insights here that all of us entrepreneurs should understand.
"The immense amount of digital currencies all end up cannibalizing each other's value due to excess capacity and supply," said Licata. "People start to notice that the meteoric rise in coin prices is a thing of the past. Investors start to sell. This drops the price even more. More people start to sell. And then.... Pop! The downward trend of the bubble spirals out of control. It seems like the new technology is now doomed. But it's never the end of the tech."
In other words, bubbles don't kill the technology. The dot com bubble didn't stop the internet. The railroad bubble wasn't the end of trains. And the cryptocurrency bubble will not be the end of blockchain technology. After the bubble pops, the underlying infrastructure does not go away. Instead, the building blocks of the infrastructure get really cheap so that other companies can leverage it.
The Telegraph Bubble
"The telegraph bubble was the first for the Information Technology economy," says Inamullah. "When Samuel Morse showed the world how he could transmit a message through wires, the world responded with yet another speculative bubble.The telegraph spur happened over the course of about 6 years. The countless miles worth of telegraph wire increased by 1,000%."
In fact, there were too many lines, and eventually most telegraph related startups died out. The pop of the bubble did not kill the infrastructure, however, as the wires were still around.
Telegraph became so cheap and available, that companies which were able to leverage the infrastructure best turned into giants. This includes the Associated Press, Western Union, and the modern stock market. It was information and value based companies who were able to take advantage of telegraph the most.
These companies leveraged the infrastructure of the telegraph bubble and still thrive today. They did this by offering a very simplistic service through an existing oversupplied infrastructure with a fresh batch of interested users. Low costs, and high demand.
The Railroad Bubble
"About 50 years later you see the same story with railroads," says Licata. "They get overbuilt and eventually about 25% of them go bankrupt. But this didn't mean the infrastructure disappeared. No one was going to fund the removal of railroads. Instead, prices to freight cargo just fell drastically."
those who could greatly benefit from bulk orders of products were well positioned to leverage this infrastructure. This is where you saw mail-order businesses grow. In fact, this was a significant revenue driver for former retail giant Sears for many years.
Mostly, you saw consumer goods based companies emerge as champions.
Procter & Gamble, Coca-Cola, Heinz (recently acquired for over 20 billion dollars), and several others saw success because of their ability to leverage the infrastructure created by the railroad bubble. The greatly reduced cost to ship products around the world in large quantity made the cost of selling products across regions a fraction of what it used to be.
Dot Com Bubble
"The dot com and fiber optics bubbles are so closely related, that we can group them as one," says Inamullah. "At one point there were over 90 million miles of fiber-optic cable. It was estimated that only about 5% of these cables were being used. This is the defacto sign of a bubble. Too much infrastructure was created. You probably already know who the winners were here."
Once the bubble popped and most of the start-ups withered away, consumers were left with easily accessible and extremely cheap internet. Next thing you know, everyone was connected to the web. So who took advantage of this resultant infrastructure and user base? This is where you saw online advertising, content, and ecommerce emerge. Companies like Google, Facebook, and Amazon are some of the biggest names in the business today.
All of these companies were able to leverage existing infrastructure to the greatest extent. Their scaling costs were extremely low, and they were able to make incredible profits as a result.
The Blockchain Bubble
We're seeing a clear pattern here, so what's the infrastructure for blockchain and who's going to be the Coca-Cola's and Amazon's of this bubble? Bitcoin started the blockchain bubble. Bitcoin may stay or Bitcoin may go, but what's definitely going to be with us is the underlying blockchain technology.
"The same infrastructure being spawned for the sake of cryptocurrencies has now created one of the most powerful computing networks in the world," says Licata. "It's safe to say that this proliferation of blockchain infrastructure is another thing to be capitalized upon. Thousands of nodes synchronized together, constantly supporting one another in a decentralized fashion."
There are far too many ICO's and cryptocurrencies to properly keep track of now. Soon the most promising of these cryptocurrencies will have to viciously compete with one another over market share. You can already see Bitcoin greatly losing market share to Altcoins (despite a growing speculative price). You already see Bitcoin Cash, Ethereum Classic, and several other potential future forks. There are also several separate competing coins like Monero, Zcash, Ripple, Litecoin, etc. Most currencies will not survive the bubble burst.
This is just the harsh reality. By analyzing past bubbles, we can discern that companies that best leverage this newfound excess of infrastructure and growth of user base will be enormous players for time to come.
Possible Blockchain Survivors
Companies like Golem, which created an AirBnB type market with blockchain infrastructure, are quite promising. They will soon have an enormous supply of affordable computing power at their disposal.
The recent crypto kitties example shows that a company can slide right in and leverage the existing infrastructure and user base. Unfortunately, the flooding of the network, increased gas costs, and delays of ICO's also showed that there isn't room for everyone. Eventually, most of these companies will die off. ICO's that are far too tied to the price of Ethereum will fail in a world where Ethereum doesn't survive the bubble.
Companies that can rely on infrastructure like supply chain solutions (like Viant) or distributed storage systems (like Filecoin), will likely have a stronger shot at surviving the collapse. They will be able to leverage the abundant infrastructure in order to greatly lower costs, and ride out the burst of the bubble.
"This analysis was a motivating reason reason why I joined the team at MIMIR Blockchain Solutions," says Licata. "MIMIR's entire goal is to leverage blockchain infrastructure to seamlessly provide blockchain access to end users by greatly taking advantage of the enormous node network being created by the blockchain bubble."
What MIMIR is building is quite reminiscent of what Verisign built during the dot com bubble. Verisign was an infrastructure layer that turned the existing internet into something useful for ecommerce.
These behind the scenes actions, similar to the role Linux had played with pushing the internet to the next wave, will become the "magic" behind the technology that stays for years to come.
Whereas the biggest names in blockchain today may not be the biggest names tomorrow, be sure to look for companies that provide solutions across blockchain infrastructure. When the blockchain bubble pops, the infrastructure companies are the ones best poised for the post-hype future applications of this powerful technology.