The Bubble Doesn’t Matter – The Technology Does
Almost a decade after the open-source Bitcoin software was released into the wild; we are now watching the rise of a blockchain-based financial system that promises to re-define the world’s definition of commerce and value-transfer.
Crypto assets have been the subject of eager speculation since Bitcoin’s price was first calculated — as the cost of the electricity used to run a Bitcoin-mining laptop. Since then, veterans of the space have become accustomed to the wild fluctuations of the price of Bitcoin and other digital assets.
In this article we will explore the reasons why technological development, not price, should be the chief concern of anyone participating in crypto, using two critical mental models.
Why Technology is Central to the Value of Cryptocurrencies
Constituting a crypto asset’s price is its utility value, and its speculative value. Utility value reflects the fundamental value that the asset possesses – either as a security, store-of-value or utility token.
The speculative value indicates investors views on the future worth of the asset, based on the future opinions of its value. When the speculative value of any asset becomes disconnected from its underlying utility value, a bubble forms. The price continues to rise before peaking at an all-time high and then correcting, often sharply.
This process repeats itself, reflecting the Gartner Hype Cycle.
The Gartner Hype cycle describes the movements of price and expectation with the development of almost any new technology. It has five distinct stages.
- Technology trigger: Appearance of a new technology stimulates interest and causes a rapid increase in price/expectation. ‘Proof-of-dog is a new consensus mechanism better than Proof-of-work or proof-of-stake.’
- Peak of inflated expectations: Hype builds and dramatically exceeds the current level of development of the technology. ‘Proof-of-dog is going to be the consensus mechanism for all new coins.’
- Trough of disillusionment: Realitysoon sets in, and expectation falls as people realize that real-world implementation is further away than they thought. ‘Proof-of-dog is never going to work.’
- Slope of enlightenment: Price and interest rise more gradually in proportion to the practical uses of the technology, which develop steadily. ‘Proof-of-dog works well in these specific contexts.’
- Plateau of productivity: The expectations become incorporated into everyday life as the technology finds its niche and the price reaches a stable equilibrium.
The December 2017- January 2018 crypto bull run maps nicely onto this Gartner hype cycle, as this period represented an enormous peak of expectations. If we look back through the history of Bitcoin we see that the Gartner hype cycles work at scale — each peak and trough leads to a new, basal level of price and adoption. Any crypto asset will exist at a different stage of the Gartner hype cycle at any given moment in time. This is true also of the space as a whole.
How Technology Continues to Underpin Value
Despite the ‘trough of disillusionment’ stage representing a bear market, this stage is when the real magic occurs. Engineers, coders, and entrepreneurs can focus their efforts on projects without being distracted by euphoric price increases. Developers lay the foundations for future, more widespread adoption of their technology, ready for the Gartner hype cycle to begin again.
It is also important to understand that the beginning speculation stage (stage 1) is not inherently detrimental. As price and hype rise, the lure of profit attracts those eager to participate in the wealth making. This serves an essential function in the development of an asset class and industry because the best and brightest are attracted to build this new future.
We should, therefore, turn our attention to the underlying fundamental technology as the real long-term indicator of price and expectation. The reason for this is that price inevitably follows the creation value. Only by solving real problems and catering to real needs will a project and its underlying technology enjoy long-term success.
For a technology answering a tangible societal need with a dedicated group of developers working hard to build the technology, the average, long-term trend is increasing, despite bubbles and price hype.On a day-to-day, month-to-month or even year-to-year timescale, the price-hype does not serve as a useful indicator of the actual value, either placing too little or too much price expectation based on the technology’s current stage of development.
The Last Word
Eventually, the proportion of an asset’s total value made up by its speculative aspect diminishes as its utility becomes clear, transitioning into its plateau of productivity.
Rather than despair during the bear markets, feel reassured that developers and entrepreneurs are hard at work building the future of financial markets based on blockchain.
Armed with this framework, let us know in the comments below the blockchain technologies and applications you are most excited about.
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