An analysis of the 2018 crypto market collapse and the following crypto winter

Anyone who has been dealing with blockchain and cryptocurrency technologies for a couple of years may still remember the market crash in 2018 and the one and a half year crypto winter that followed. The situation is well reflected in the bitcoin exchange rate shown in the figure below. Of course, the volume of the total kritpo and blockchain market is much larger than the current price of Bitcoin. However, since Bitcoin is used in most places as an interface crypto currency to enter and exit the crypto world, the chart below also shows the general cryptoconditions in 2018 quite well.

The Bitcoin price from 2014 to nowadays

First of all, it is important to note that we believe the blockchain is basically a transformative exponential technology. Exponential technologies have been evolving slowly for quite some time, and then, after a while, reaching their exponential stage, they are being used at an ever-accelerating rate (Figure 2). One of the best examples of this is artificial intelligence, and machine learning. If we consider only the backpropagation algorithm in the narrower sense as the birth of the area, the area has been in existence for more than 45 years. Nevertheless, we are not yet there for self-driving cars to travel on the roads on a daily basis, but it is conceivable that we will reach it within 5-10 years. This means 50-60 years until the technology reaches its true exponential stage, where it will actually result in radical innovations. Blockchain algorithms have been around for about 10 years. We believe that this technology will reach its exponential stage faster than artificial intelligence, but it may still take 10 to 20 years.

Life cycle of an exponential technology

On the other hand, general human thinking tends to underestimate the impact of a technology, especially if it is exponential: we tend to overestimate the effects in the short run, while we underestimate the effects in the long run. This is probably due to the structure of the human neocortex, which specializes in pattern recognition that is basically close to linear, so it also tries to approach an exponential change linearly. From another approach, the high level of media attention in the area caused a problem. With fundamental long-term technological change, the media tends to go to extremes: for example, to advertise something as a world-saving technology for half a year, and then, if it doesn’t change the world in six months, to declare it unusable.

Another feature of blockchain technology is that it is an infrastructure financial technology. In this respect, it is somewhat different from a simple fintech application that tries to save the world with a fancy mobile app and some business logic. It is more like classic infrastructure technologies such as the highway from which a few thousand kilometers have to be built in order for other applications to run on it, such as cars, trucks, motorcycles, and so on.

In 2015-16, a new application related to blockchain technology, called token sales, appeared, the earliest form of which is ICO (Initial Coin Offering, Figure 3). Token sales as a technology has fundamentally liberalized the investment market, both on the demand and supply side:

- On the demand side, it provided a new opportunity for any investor to acquire a stake in a startup starting up anywhere in the world on a basis of up to a few dollars.

- On the supply side, it provided an opportunity for a startup to raise funds from anywhere in the world, even in crowdfunding style in the form of individual investments of a few dollars.

In this sense, the problems arising from the short-term perception of the aforementioned exponential technologies have intensified even more than usual. Simply put, the blockchain is a technology that can implement its own financing as well.

Number of ICO-s around 2018

The biggest problem with ICO technology has been the complete lack of regulation in specific business implementations (and in some places this is not fully clarified today). This did not cause too much of a problem in the initial period of 2015-16, as it was mainly serious professional projects that carried out token sales, and since the technology was not very well known, mainly professional investors could be found in the market. By 2018, however, this has changed as a result of both the press publicity and the incredible exchange rate gains of the first successful projects:

- From the investor's point of view, investors who were not so much interested in technology or in the long-term success of a platform, but only in short-term exchange rate gains, began to dominate.

- As it was seen that there is quite a lot of “free money” in the market, startups have started to raise funds irresponsibly. Of course, there were also teams that did some serious project and teams that didn’t want to do anything just put away the funding they collected. However, most of the attempts were somewhere in between: since the funding was free, many tried to implement a project without worrying too much about whether there was or would be a specific market demand for it.

Overall, we believe that the factors mentioned above are:

- the beginning of the technological curve

- increased media attention and unrealistic expectations

- a liberalized investment market and "free money" without any regulation or control

they themselves have created an unsustainable market, inevitably creating an investment bubble.

The final push for a concrete market collapse was caused by a total regulatory fire that hit the ICO market in early 2018, but without it, the aforementioned scheme would probably not have been sustainable for a long time. The market crash was followed by a one and a half year crypto winter, causing significant difficulties for downsized and blockchain companies that incorrectly assessed market demand for their products, either because they paid enough attention to it or because the idea they came up with was too “early”. . During this period, it was very difficult to attract new funding from token sales, but classic funding was not always given to such ideas, so most of these startups failed.

The end of the crypto winter began roughly a year ago, when serious and at times conservative institutions began to enter the krito and blockchain market. Perhaps the first was Facebook, which, although it had banned posts and ads in this direction for years, still came up with its own blockchain and crypto platform. Facebook was followed by various institutionalized and controlled implementations by Swiss banks and, from 2020, by some German banks and the ICO, such as IEO (Initial Exchange Offering) or SAFT (Simple Agreement for Future Tokens), with moderate success for the time being. Last but not least, the European Union is testing its own blockchain platform, and J.P. Morgan, calling Bitcoin a scam for years, is launching its own Bitcoin-based investment services.

We might say a little biasedly that the future of technology is not in question, but individual business implementations and specific market developments already do. The emergence of enterprise-level institutions in the market does not preclude the emergence of similar bubbles at all, and in some cases they may even be much larger than in 2018, given that the capitalization of the entire crypto market is still far below the size of the dotcom bubble.

Dotcom bubble and the crypto hype

Smart browsers: on web browser and crypto-blockchain integration

The next stage of the blockchain-crypto adaptation might be if we imagine strong integration possibilities between web browsers and the blockchain crypto space. One similar example is metamask that provides several useful functionalities that can be used with decentralized applications driven by ethereum. Metamask is however only a plugin for chrome. Web browsers should support blockchain - crypto applications in a native way. Actually, there should not be very much difference between a web browser and a crypto-wallet. Instead a new concept should be introduced, Web3 browser or perhaps smart browser, that integrates crypto-blockchain functionalities with classical web browser elements. As there are already initiatives in this direction, like Mist wallet, however Mist is pretty much a geek tool without having too much support for standard users. Successful smart browser, or Web3 browsers should be initiated by traditional browser providers.  

Blockchain and GDPR

Making a Blockchain solution GDPR compatible is not an easy task. What you can consider is the following: 

- Do not store personal data on the Blockchain. If so, you do not have too much problems with the GDPR, like as an example if you generate keys randomly that are used directly or indirectly as addresses and you store the personal identity for each key in a centralized registry that can be deleted or modified, you can be GDPR conform. 

- You can try to store implied information of the personal data, like hash or hash of the hash of the personal data, or encrypted personal data. If the data is deleted, the actual data will be deleted behind the hash and you might as well have a new blockchain entry to show that the given hash value was deleted consciously. 

- physical deleting from the Blockchain is not really supported. However some blockchain platforms support something as archiving the blockchain at certain stages. Instead of archiving, you might as well imagine simply to delete the history. Certainly, it means security of the blockchain will be surely much smaller, but it might be acceptable in certain situations. 

Notes on cross-company business processes

Modelling business processes intern in a company might be totally different as speaking about processes between different companies. The reason for that that companies are built up based on different departments and the major challenge of a corporate business process is to describe the information flow of the department. If we speak about cross company processes however they have a little bit different characteristics. Companies working with each other mostly based on markets, either based on general free markets or some kind of a limited market. Another important difference is that information can not free flow freely, it has very strict private characteristics. As a result, if we want to define cross-company business processes we should much more concentrate and model the markets that are connecting the different enterprises. 

Consortium blockchains and business processes

Business processes describing consortium blockchain solutions should be fundamentally different than processes describing the operation of individual companies. The reason for that is that is that companies do not really communicate with  each other in an absolutely free manner. They regard company secrets as a very strong fundamental basis and they cooperate with each other only on a special interfaces. As interface I do not necessarily mean just a technical interface, the cooperation of the two companies usually mean that one provides a service, or sell goods that the other one can buy. So the major cooperation is actually the exchanging of goods and services and not some kind of another information sharing. This implies that best consortium blockchain processes must be able to describe different kind of crypto-assets, the relation, exchange, visibility and access rights of these crypto-assets as a primary goal. They must provide the way of putting most of this logic into the blockhain itself realizing with for example smart contracts and they should provide a way to create and configure things with the help of graphical user interfaces. In this sense Hyperledger Fabric has a good direction, even if they can not provide graphical user interface at the moment.  

Blockchain: the new trust layer of the internet

Cryptocurrencies and blockchain technologies are among the best hyped technologies all around the world. Although the technology first appeared in 2009 first as an initiative of a mysterious person called Satoshi Nakamoto the real strengths of the technology hasn't been recognized for a while. The major reason for the recent hype is that the world is getting aware of the technology and trying to understand which use-cases can be efficiently covered by blockchain apart from cryptocurrencies and Bitcoin.  

To understand the real potential of blockhain, the best was is to compare with an old classical protocol internet protocol, like TCP / IP.. Although it sounds technical pretty technical, the TCP / IP protocol is nothing more than a technical cooperation way between different computers for reliable  data transfer. The protocol appeared around fifty years ago, got a little bit more widespread thirty years ago. At first sight it seemed to be a pure technical game for scientific people or tech geeks to exchange information. However nowadays we can already conclude that the TCP/IP protocol has basically changed the world. It is the basic backbone of the internet itself, practically everything that is regard currently as internet or web is based on this technology. It is important to note from a business or marketing perspective that there are many applications of the technology wasn't foreseen thirty years ago. Examples are Facebook or Twitter that are based on this protocol but no-one could predict previously that the become million dollar industries.

From a practical point of view blockchain or distributed ledger technologies are similar to the TCP/IP. They are simply IT, collaboration protocols but instead of reliable data transfer, they realize a trust protocol between different actors. Let we just imagine the situation that there are several actors throughout the world who want to collaborate with each others and exchange value. As an examples, they want to exchange or transfer a currency. These actors are geographically decentralized, they do not know each other, they do not trust each other and actually they do not want to trust each other. Hence they are not necessarily humans, but for examples different IoT devices communication and transferring value with each other. blockchain protocols simply guarantee from an algorithmic level that these actors can exchange value with each other even with such a circumstances.

Traditionally, trust based services were provided by centralized institutes like banks or insurance companies. They provided a working model for many years, however they suffered from many problems, like inefficiency, slowness or sometimes from censorship. Blockchain technology simply disrupts this institutional business model and provides a much faster, cheaper and fairer way for exchanging value or to realize trust based services on the internet.  

There are two major, a little bit controversy applications of blockchain nowadays: cryptocurrencies and token based platform funding (called ICO at the moment) that are disrupting traditional money transfer and corporate funding. It is important to note however, that they are just applications on the protocol. One of the major reason of the Hype that the world is experimenting currently which other classical trust based services can be realized in a more efficient way with the technology.

Certainly, we are pretty much at the dawn of distributed ledger technologies: there are still many technological drawbacks, due to the lack of regulation many scams, and of course classical institutional trust based industries managing billions of dollars won't adapt so easily. Which fields and use-cases will reach the real mainstream adaptation is something that we will probably see in ten-twenty years.

Consortium blockchains and market positioning

Consortium blockchains are pretty hard to sell, because of the fact that they need basically the coordination of several consortium members including negotiating and renegotiating the cooperation among all of the consortium members. To sell such a solution, you do not only sell a product to one enterprise, but possibly to several enterprises, this can be pretty tough. There are however natural business consortiums, sometimes foundations throughout the world which have the basic activity to integrate several exiting companies and to negotiate or re-negotiate different things or to focus on legal process of the different consortium members. Such a natural consortiums can be ideal starting points to position consortium blockchain solutions. 

ICO-s, market liberalization and marketing

From an economical perspective token sales and ICO-s are liberating the funding and venture capital market and big steps for economical and financial equality in the world.

- Demand: You have 10 euros that you want to invest into a start up business, with the classical funding possibilities you did not have the chance.

- Supply: If you want to launch a new business and you need funding, previously you needed banks and business angels, actually very small amount of people in the world really have the possibility to get funding for a new business.

So, practically everybody who wants to ban token sales like Facebook , Google or regulation saying indirectly for a couple of billion people the following message:

You guys born in poor region ? You do not have access for an efficient financial infrastructure to get funding or to invest? That is your fault, you deserve it, we like it that way. Even if there would be an efficient funding infrastructure that you could use, we ban that.

Honestly, I am not an idealist, world works sometimes this way, we have historical examples for that.

However, after saying indirectly fuck off for a couple of billion people it is pretty difficult to make for any of these parties such a marketing that they are the good guys.

Permissioned versus public or private transaction in blockchains

It is important to note that if we regard transaction privacy of a blockchain system, there might be two different categories to consider:

- transaction privacy: if a transaction visibility is public or private

- transaction permission: here we usually consider something on a higher abstraction level than simple transaction. As an example, something as cryptoasset. In this sense it makes sense to imagine systems where different transactions can be associated with different permissions. 

Certainly, there is an additional dimension that can be considered: it is the publicity of the P2P nodes of the system. 

The different combinations are shown on the following diagram:

1. Systems like Bitcoin or Ethereum are public and non-permissioned. Certainly, there is always a minimum default permission even at non-permissioned systems: only the owner of the private key can spend or transfer the asset.

2. We would expect from a voting system that is private and non-permissioned, meaning that everyone can participate but the voting itself is not visible directly on the blockchain. Cryptocurrencies like Dash or ZCash are developed in the similar direction as well. 

3. A Land title system would have the properties of being permissioned and public.   

4. Last but not least a typical banking application would have both the characteristics of being permissioned and private. Blockchain frameworks as Hyperledger Fabric are able to realize such an applications. 

A Securities Law Framework for Blockchain Tokens

The most important frameworks for an ICO to evaluate if a token is a security or not:

https://www.coinbase.com/legal/securities-law-framework.pdf

Howey test:
https://docs.google.com/spreadsheets/d/1QxOV2dgxO3C_TyVE0-41ZwLlzPmB-EE1NNshJGuedCU/edit#gid=0

The last bastion of global enterprises

The last bastion of the global enterprises seem to vanish. As an individual or small team it is already not too difficult to work remotely, make sales channels globally or recruit teams internationally. The last critical resource that used to be only available for global enterprises is capital. However it is not the case anymore. With ICO mechanism and token economics every idea, every project and small team have the same chance to get global funding as practically any big enterprise. This was pretty much the last benefit, the last bastion of the global enterprises.  

Decentralized Gamified Orgnasitation

The employment models, the corporate structures, the organisations and actually the whole work culture are in a heavy changing phase throughout the world. The reason is for that that most of the structures and philosophy comes from the industrial age where the basic model was the conveyor belt which was more or less adapted the white collar jobs, including job descriptions, job hierarchies, performance based measurement and of course the most hyped nowadays word is business efficiency. 

In the last fifty - sixty years this seemed to be pretty normal, spending eight hours in a workplace, doing well-defined intellectual work, like filling excel tables and being measured by that efficiency. However, this model does not seem to be longer maintainable. One reason is for that the increasing amount of automation of the white collar jobs, the other reason is the increasing presence of the artificial intelligence. This implies on the one hand a changed skill set from the employee side, like perhaps more flexibility, more creativity, social skills and even skills to work with artificial intelligence. On the other hand, it simply implies radically different organisations and organisation structures and I do not only mean that the corporation is located in several continents and instead of personal meeting there will be online meetings, but actually radically different organisation structure. 

As certainly noone knows how such an organisation structure would look like, there are some elements that can be identified: 

- The new organisation structure should not be only online but actually must born as decentralized and online. 

- It should be less look like as a nowadays classical organisation but rather something as a nowadays community. 

- It should not be based on processes but rather on some general internal rules that might be even changed by the community. 

- The whole internal working structure should be based on tokens and tradable tokens with maximum transparency. 

-  Every activity that can be automated should be automated or supported by automation like artificial intelligence. 

-  Overall where people work the work itself should be maximally gamified. Human performance should be reached overall by playing games. 

- There should be the possibility actually to play different style of games to do the same corporate activity.
- The border of the organisation should not be handled too seriously, the corporate "game" must be played together with vendors, suppliers, customers....

If it seems to be idealistic just imagine that the Linux foundation and the whole open source community; it works pretty much similarly and as practically Linux has beaten Microsoft Windows in the operation system competition, I would say, they were pretty much successful.  

Let we call the new organisation structure as Decetralized Gamified Organisation. 

Emerging Blockchain markets - gamification of the technology

As both Blockchain and the cryptocurrency field is extremely complicated and complex, there is an emerging market gap for teaching the technology with the help of gamification. It might includes simply tales or children books, however more complicated scenarios can be imagined as well, ranging from flash or online games to learning portals with designed gamification simply to teach the technology. 

Emerging Blockchain markets - testing and quality assurance

The fact that solidity is for the first run a pretty easy language and provides the possibility almost to everyone with some javascript experience to write smart contracts is resulting some unexpected consequences: to program solidity is easy, however to write a code that is really capable to store a large amount of ether, without the risk of being hacked is far less trivial. This practically means that everyone writes smart contracts however most of them can be probably hacked. This provides the possibility for a new market opportunity: quality assurance and testing of Ethereum smart contracts.

Quality assurance would provide practically everything that can be regarded as software testing in highly secure and critical software context, like different stages of software testing, unit tests, formal verification of the code, programming best practices, penetration testing or competitions for white hat hackers to break the code.     

The end of banks - from a game theoretical perspective

We will probably see the end of banks and I am not arguing from a cryptoanarchist perspective here, but from a purely market - game theoretical perspective. On the one hand the financial crisis in 2008 caused a massive erode of the trust of the banks and increased the regulatory attention and administration. On the other hand due to fintech and decentralized technologies new and competing segments appearing that cannibalize directly the business of the financial institutes. On a long run, it means that due to the increased competition the banks will have to provide services cheaper and cheaper meaning probably cost cut for the first run the personal. However that also mean that they can offer less and less quality services, that is pretty much dramatic as it will very stark further erode the trust and provide the competitive benefit to the competitor fintech - decentralized segment. 

The situation implies on a long run a new equilibrium on the market without the existing banking institutes. Probably the banking institutes will be replaced by decentralized infrastructures for value transfer. 

Radical change in business education ?

Surprising that all of the best business schools around the world start to offer technology oriented courses, like strategy making for artificial intelligence, supporting sales with big data and machine learning, blockchain for business. It seems these technologies are the disruptive technologies that are thought to change radically both the business life and the management practices. 

It is important to emphasize again that the initiative does not come from tech geeks, not even from technical universities but actually from business universities, like Oxford and Blockchain, Harvard and AI. It seems that the "crazy" ideas that were previously communicated only by tech geeks and futurists start to reach mainstream adaptation.

Certainly, one interpretation might be that the management practices are pretty much lacking of creating something new, but I actually do not really thing that it is the case. It is about the best business schools throughout the world: If they teach technology, they thing technology will be the most important thing in business making. 

Microsoft, abandoning the ship

Microsoft used to be a pretty ambitions company that tried to compete with the whole IT world almost in every possibly segment. The strategy was actually, simple they produced a lot of different products and services that were sometimes probably not best in the world but with two simple strategies it was despite possible to compete with the rest of the world:

1. Technology synergy: the products were pretty much compatible with each other and mostly incompatible with the rest of the world. It implied that at selling one state of the art service, a couple of related perhaps not so state of the art products were automatically sold as well. 

2. Community: there was a relative big and convinced community, that helped both at bootstrapping the new products and knowledge based and at pushing the sales further even with products that were perhaps not the best on the world. 

However, this strategy has been pretty strongly changing for 3-4 years; the new strategy seems to have the following properties:

1. instead of a one big closed technology block, in which services are compatible with each other and incompatible with the rest of the world, the direction seems to achieve maximum compatibility with each service with the rest of the world, including competitors products. 

2. an implication of giving up the technology synergy that only world class services and products can survive, and well actually it seems Microsoft tries to cancel 80% of its technology portfolio. There seem to be 2 main focus of the strategy Azure and SQL server, and perhaps 2-3 elements that will somehow further exist like Windows but only at some client applications, Office in an online form and so on. I seems all the other products are actively being cancelled, like classical development directions (.NET, C#, classical Visual Studio or TFS), Windows as a server solution or the whole mobile direction.       

3. with the aggressive and fast cancelling of the existing product lines both the community and the existing customer base seem to vanish. And I think this advantage can not really be reached back again, even with slogans like Microsoft loves Linux, there is not much chance that the old fashioned Linux customers or community members change to Microsoft. 

4. the new and innovative direction seem to be pretty much questionable:

- The future of quantum computing is pretty questionable, on the one hand it is not sure how fast an industry scale quantum computing can be reached. On the other hand, companies like IBM have got ten years of first movers advantage in the field, like having put onto the market online collaboration platform for quantum computing. 

- Virtual reality and augmented reality will have the first big success in two fields: gaming and porno. Due to market success, both the hardware will be cheaper and a big developer community will appear. As a consequence, Microsoft will have an over-prized hardware with a developer platform, that is used only by a couple of developers. 

-  For artificial intelligence there is a pretty strong competition on the market, like IBM Watson, or Google Deepmind. I think the field has got again a high competition and it is highly technical, so Microsoft surely needs to produce more than some fancy chatbots. 

5. on the top, there are some signs that are rather annoying:

- focusing and communicating too much about the internal reorganization is always a sign that the company did not really succeeded to do anything powerful with the products or markets. 

- having over-positive communication and a lot of emotional elements in the communication, like story telling is usually a good way to put the stock price high (and sell before the price collapse).

As a result, the question is raised naturally: Will Microsoft go down ?  

  

Micro-economical considerations of the cryptocurrency mining

Cryptocurrency mining especially proof of work can be analysed from a pure micro-economical point of view. First of all, the market is about transaction validation. The mining economy is split into two parts: the miners provide the supply for transaction validation. Other actors, like users, merchants, exchange services that send transaction into the system provide the demand for transactions. 

It started somehow in a way that everyone could  run mining on a simple laptop, implying practically a perfect competition between suppliers with minimal fix costs and entry barriers. As the hardware requirements developed further the fix costs of the miners were getting bigger and bigger, implying centralization efforts which was manifested for example in the appearance of mining pools. It means that the transaction validation market moved from the perfect competition to the monopoly direction, having at the moment somewhere at the stage of oligopoly. 

In this sense we might as well define centralization and decentralization in the sense of market structure, meaning that in a total decentralized application the transactions of the application are executed on a supplier market that is globally distributed and is in the state of perfect competition.    

Does Cryptocurrency mean the end of Fiat money ?

Perhaps the question itself is a little bit provocative, however we might as well consider the appearance of the cryptocurrencies simply from an evolutionary perspective. As barter was replaces by primitive, following coinage, then paper money and fiat currencies, perhaps cryptocurrencies are simple the new stage of the financial technology evolution. Certainly for the first run Bitcoin and other technologies provide rather a simple money transferring technology. However, there not seem to be any reason why the technology could not extend to a broader area, providing general financial services besides money transfer. One example for that is the appearance of cryptograhicaly funding services, like ICO-s that have the chance to replace the whole venture capitaslim. In this sense, we might as well easily imagine that in a twenty years, fiat style currencies will hundred percent replaced by crypto style financial services.    

Notes on disruptive educational technologies

Udemy, Coursera, Nanodegree, Getsmarter and a docent of different online educational platform have been being emerged from the void in the last couple of years. They are sometimes different regarding on the business model and the used technology: as Coursera and Getsmarter concentrate rather on getting the education from well-known universities, Udemy tends to be rather an open platfrom for everyone. It is however surprising that high-quality knowledge itself have become very cheap and very wide-spread. It will surely have disruptive impact both on the global education and on the job market as well.