Why it's normal, what's happening in the crypto market right now, let’s put things into perspective
Bitcoin descending, the crypto market in the claws of the bears. Frightened investors, FOMO quickly became FUD. But what is happening at the moment on the crypto market? Everything is normal, says Anton Werner.
Looking back a year: sheer euphoria. Rapid price increases for leading cryptocurrencies such as Bitcoin and Ethereum. Countless stories about people who became multimillionaires overnight. Gold rush. It paved the way for hundreds of new Blockchain projects to raise huge amounts of capital by issuing their own tokens through Initial Coin Offerings (ICOs).
One year later: reality caught up with us
More than 50 percent of the projects have meanwhile failed. Most of them are Web 2.0 products that should be transferred to a blockchain. Native tokens should be used as a means of payment for the service being offered and should increase in value as service (and thus demand) adopts. This approach should - it is now clear - fail due to erroneous token economics and bad UX due to lack of customer acceptance.
In general, the mood in the crypto market is at its lowest point after a months-long, persistent decline in prices. Total market capitalization lost nearly $ 700 billion - or 85 percent - during the year. Many even question the viability of cryptocurrencies.
What does that mean for the crypto market? Are cryptos dead?
On the contrary. On the whole, what we are currently experiencing is much more a much needed, completely normal and even healthy correction of the market.
A correction as it is an integral part in the early stages of the life cycle of any new technology. Gartner's hype-cycle model, first published in 1995, characterizes the typical course of an emerging technology from initial user and media enthusiasm, through a period of disillusionment, to a later understanding of the relevance and role of the technology in a market or domain.
While the first part of the curve is driven by senseless hype - fueled above all by media that speculate largely about the perspectives of technology, the second part is primarily determined by performance, (mis) success, and acceptance.
The 5 phases of Bitcoin hypes
These two parts of the hype curve can be subdivided into five different phases:
Let's take a look at these phases.
Technology Trigger: From this point on, the new technology starts to experience some important breakthroughs. While early proof-of-concept stories ensure initial investment, the usability and cost-effectiveness of the technology is still uncertain.
Peak of Inflated Expectations: More and more success stories of the new technology are becoming public. More and more investors are showing interest in the market, regardless of their understanding of the nature of the new technology.
Trough of Disilusionment: Many projects fail. The initial investor interest begins to fade. Only a minority survive and drive product enhancements to meet the needs of previous users.
Slope of Enlightment: The usability of the new technology is widely recognized. Suppliers start products of the 2nd and 3rd generation. Although conservative companies continue to be cautious, more companies are beginning to allocate funds for pilot projects.
Plateau of Productivity: Products based on the new technology will become the market standard. The criteria for the broad marketability and relevance of the technology are more clearly defined. Profitable business ideas thrive.
Sounds obvious, right? But is this model actually a compass for reality? In other words, do new technologies really follow these hype cycles? For the Internet, the clear answer is yes.
Consider this cycle in detail.
While the Transmission Control Protocol and Internet Protocol (TCP / IP) have been around since 1983 - they are considered the technological foundation of the Internet and set standards for data transfer between multiple networks - it took until 1990, when computer scientist Tim Berners-Lee officially invented the World Wide Web (Innovation Trigger). The resulting hype, driven by all-round utopia, culminated in a series of successful IPOs by US and European Internet companies in 1999/2000 (Peak of Inflated Expectations).
But the immature technology was not the all-awaited, instant wonder weapon. So many companies failed in trying to put their plans into practice. The interest of the investors decreased increasingly. A massive market adjustment was the consequence. Over a period of only two and a half years, the stock market index Nasdaq Composite (which included many Internet-based companies) fell by 78 percent. Two trillion (2,000,000,000,000) dollars have been destroyed (Trough of Disilusionment).
In the end, only 48 percent of Internet companies survived the bursting of the dotcom bubble. Subsequently, it was reserved today's giants of the technology industry, the adaptation of the Internet in the mid-2000s to further promote. Amazon launched Amazon Prime, Apple celebrated its first success with the iPod, Ebay took over PayPal and Google put a successful IPO on the floor (Slope of Enlightment).
At the end of 2010, 29.2 percent of the world's population used the Internet. The Internet had thus successfully developed into a mature technology (Plateau of Profitability).
The technology is omnipresent today
And today? Smartphones have changed our way of using the Internet. Meanwhile, social media has become a well-established communication channel. In short, the Internet is an integral part of our lives. The rapid spread of the Internet is also reflected in the stock market values of the companies that drove them forward: the aggregate market capitalization of the five largest Internet companies (Apple, Facebook, Alphabet, Microsoft, Amazon) is almost twice the aggregate market capitalization of all 280 Nasdaq-listed (Internet) companies at the height of the dot-com bubble.
The developments in the crypto market indicate that we are again exposed to hype-cycle-like patterns
Blockchain technology and cryptocurrencies have been on the rise since 2008. Epic booms & busts, uncontrolled market swings, funky scandals and fraud - we've had it all before. Until 2017. In 2017, everything that has happened and been seen dwarfed everything. What happened in 2017 was a hype, a mania - comparable to what we saw in the Internet boom. As in the past, the price level and the actual value in 2017 were not rational. The failure of the first projects clarified this malady. Massive price corrections, a widespread market shakeout and the shortage of capital due to the declining attractiveness of ICOs were the result. This has led many to publicly dismiss blockchain technology and cryptocurrency as overrated and worthless.
There are many indications that blockchain technology and cryptocurrencies have entered the "through-disillusionment" phase, but that they will soon pass. How long we will be in this phase is pure speculation at this point. In the past, we have seen average lengths of two to four years. However, fast-developing technologies sometimes manage to break out within six to nine months. Of course, there is no guarantee that it will create all the new technologies from the "trough of disillusionment" phase.
However, we are convinced that blockchain technology and cryptocurrencies are not just an unfortunate, short-lived mood of the market, but that they will prevail over the long term and, like the Internet, become a mass phenomenon.
The reasons for that I will explain in my next article. Stay tuned!
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