This is the second of a multi-part series on cryptocurrency, examining the dream and promise behind cryptocurrency, the evolution of the technology, the challenges faced by it on the way, and finally, its future. It is suggested that you read the first part before reading this.
The premise behind Bitcoin and the blockchain was inspiring in its ideological purity: setting finance free from centralized control and removing single points of failure. But over a decade later, the great cryptocurrency paradox is clear – an innovation aimed at decentralization has frequently resulted in more centralized consolidated power. A movement intended to empower everyday people has enriched a relatively small number of traders and venture capitalists. And a technology designed to be free from manipulation has often amplified speculative mania and boom-bust cycles.
In many ways, the ideals behind cryptocurrency have been lost amidst rampant speculation. What emerged from utopian dreams of revolution has frequently morphed into just another asset class for making money, detached from its original purpose. The reputational damage this has caused to cryptocurrencies cannot be understated. To much of the mainstream public, crypto is now seen as a casino rather than a serious technology for bettering society.
This gulf between the values that inspired crypto and how it is frequently used today is in many ways tragic. It can leave supporters disillusioned to see an innovation with such potential be reduced largely to a plaything for financial gain. But examining how this paradox emerged provides insights into the growing pains that accompany radically disruptive new technologies.
The roots of crypto’s reputational challenges trace back to the very nature of decentralization itself. By eschewing centralized gatekeepers and oversight, cryptocurrency ecosystems have long been more unruly than traditional finance. The ethos of individual sovereignty attracts both visionaries and rogues alike. Without mature governance, hype and hysteria have ample room to grow unchecked.
The ICO boom of 2017 perfectly encapsulates these challenges. As cryptocurrency prices exploded, hundreds of early stage projects raised astonishing sums of money by selling tokens to retail investors. Caught up in gold rush fever, many people poured savings into sketchy investments without regard for risk. Yet absent were the investor protections that regulated markets have developed over decades to dampen excess speculation.
Some examples illustrate the extremes. Protocol Labs raised $257 million in an ICO to fund development of the Filecoin data storage network without having any working product. Block.one raised $4 billion to build the EOS platform, setting a new record for the largest ICO ever. Meanwhile, small retail investors gambled savings on highly risky cryptocurrency projects with unrealistic promises.
When the crypto market crashed, many of these overcapitalized projects collapsed, unable to deliver on exaggerated expectations. Filecoin has gone from around $190,000 to around $3. The EOS token trades at aorund $0.5 now, compared to around $19 in early 2018 as the network became mired stagnated development.
Across the board, traders suffered massive losses as bubbles burst. It was no surprise when many of the funded projects failed to deliver, damaging trust in the entire sector.
The situation was exacerbated by opportunists who took advantage of the frenzy. Promoters hyped projects with unrealistic promises that lined their own pockets but lost money for regular investors. Unscrupulous exchanges sold tokens to unsophisticated retail buyers just trying to chase rising prices.
The team behind REcoin pseudo-cryptocurrency absconded with $4 million from investors and were later charged by the SEC with fraud. At the height of the mania, some promoters would literally fabricate white papers filled with buzzwords to raise money for non-existent blockchain projects.
The ICO craze unfortunately opened the doors for numerous scams and frauds to extract money from overly eager investors, damaging trust in the cryptocurrency space.
One high profile example was BitConnect, which raised over $2 billion with promises of absurd returns from a proprietary trading bot and lending program. In reality, BitConnect operated as a textbook Ponzi scheme, paying existing investors returns with money from new investors. When withdrawals exceeded inflows, the scheme inevitably collapsed and BitConnect shut down. Many lost their entire investments as the BitConnect token plunged 99% in value.
Another project called PlexCoin raised $15 million claiming their new cryptocurrency would appreciate 1,354% in less than a month. In reality no underlying technology was developed. The founder was hit with civil and criminal charges by the SEC for defrauding investors. He was ordered to pay $100,000 in fines and lifetime barred from serving as a corporate officer.
On the lighter side, Useless Ethereum Token openly admitted it was a parody ICO to lampoon the mania for speculative tokens. It claimed to provide no value or functionality yet still managed to raise over $40,000 from investors seeking to flip the token for quick profits. The absurd success of Useless Ethereum Token highlighted just how irrational ICO mania had become.
Some of the largest ICO frauds succeeded by catering specifically to newcomers with only a surface understanding of blockchain technology. Projects like PlexCoin preyed on investors hoping to hit it big without deeply researching what they were buying.
Scammers also impersonated legitimate projects through soundalike names or spoofed websites. Investors who believed they were purchasing Ethereum or other popular tokens were tricked into buying imitations that often had no actual value. These trading on confusion and hype resulted in millions in losses.
The ICO craze produced an array of cautionary tales. In the rush to fundraise, some founders hyped technology far beyond current capabilities. But in the worst cases outright fraudsters pushed fake projects to abscond with investor funds. Lack of mature governance and oversight in these early days of cryptocurrency allowed scams to flourish before the sector learned painful lessons about exercising greater diligence.
Even ideological proponents of crypto got swept up in the mania. A technology meant to decentralize power saw wealth concentrate in the hands of prominent influencers and foundations who had gotten in early. Rather than empowering everyday people, the greatest financial gains accrued to an “in crowd” of tech elites.
As the first ever cryptocurrency, Bitcoin itself has seen perhaps the wildest speculation and greed of any blockchain project. The price of Bitcoin has risen from less than a penny in 2009 to over $60,000 at its peak, delivering astronomical returns for early investors. This massive increase stoked intense mainstream interest and a fear of missing out.
When the value of Bitcoin began rising exponentially in 2017, speculative mania hit full force. The cryptocurrency became a constant mainstream news topic, with some analysts making outlandish predictions it would soon be worth $100,000, $250,000, or even $1 million per coin. By late 2017, Bitcoin prices approached $20,000 before plunging 80% over the next year.
The hysteria of rising prices fueled rapid price increases as new investors flooded in trying to chase profits, rather than evaluating Bitcoin’s actual utility. With limited supply and skyrocketing demand, valuations detached from any rational valuation.
Another boom and bust cycle occurred around 2021 when the SEC approved Bitcoin futures ETFs. Bitcoin once again rose to nearly $70,000 and then proceeded to lose over 60% of its value. For more than a year, the cryptocurrency has been trading flat in the $20,000-26,000 range.
These massive swings have devastated investors who bought towards the top anticipating even higher prices. But the volatility stems from treating Bitcoin like a speculative asset rather than its intended purpose as decentralized digital money.
The mentality of buying and holding Bitcoin with the sole goal of profiting from rising valuations remains widespread. This greed ignores principles of portfolio diversity and risk management. Investors enticed by potential multi-million dollar price predictions have repeatedly been burned by crashes once hype diminishes.
Other cryptocurrency developers continue building groundbreaking applications aiming to decentralize finance and power. But Bitcoin remains primarily used as a speculative store of value by investors hoping for wealth creation, rather than a means of payment.
The astronomical price swings that result from this speculation continue hampering mainstream adoption.
Now that the bubble has popped, disillusionment has set in for those who lost money amidst the chaos. Dreams of a financial revolution were replaced with searing losses that devastated families. Instead of optimism about the future, anger and resentment remain at having been duped while others profited.
Understandably, this dark side of cryptocurrency has garnered the most media attention, feeding a narrative of instability and deceit. Even if technology pioneers have noble aims, greed in human nature can corrupt them. And so for critics, cryptocurrency is indeed seen as a house of cards – an idealistic dream perverted by its own success into myopic speculation.
The damage to cryptocurrency’s reputation is self-evident: a recent poll showed 71% of Americans believe crypto investing is risky versus 23% who see it as safe. Warnings of life savings wiped out by crypto scams are common. Rather than empowerment, many see mainly greed-driven bubbles, fraud, and abuse.
The Cryptocurrency Hype Cycle
The challenges and excesses plaguing cryptocurrency as it transitioned from technical innovation to speculative mania reflect a common pattern with the introduction of new technologies. Periods of great hype often accompany early breakthroughs as society struggles to understand their implications amidst limited real world deployment.
This dynamic is captured in the concept of a hype cycle, which traces the typical trajectory of how expectations for an emerging technology evolve over time. First comes a “technology trigger” that catalyzes significant interest and leads to a fast buildup of hype and inflated expectations. But this peaks and gives way to disillusionment when it becomes clear early progress does not live up to unrealistic hopes. Criticism and negativity abound during the “trough of disillusionment”. Over time, understanding matures and pragmatic deployment gathers steam, setting up an upward “slope of enlightenment”. Eventually expectations recalibrate at a more sustainable and realistic level during the “plateau of productivity”.
The rise and fall of the dotcom bubble in the late 1990s exemplifies this hype cycle pattern. The rapid growth of the consumer internet sparked intense speculation that this new technology would abruptly transform business and commerce. Incumbent industries from media to retail were supposed to be radically disrupted and swept aside.
A euphoric mentality took hold that internet startups would inevitably dominate the future, leading to sky-high valuations of companies like Pets.com and Webvan that far outpaced any realistic near term profits. But the mania went bust when it became clear adoption would be more gradual. Untold billions in speculative investment evaporated in the ensuing dotcom crash.
But out of the ashes eventually emerged tremendously successful companies like Amazon, Google and Facebook that went on to genuinely revolutionize their industries. The initial promises of the internet were realized but only after expectations reset from the hyperbolic heights of the bubble years. This followed the typical hype cycle progression – irrational exuberance to crushing letdowns before pragmatic growth took root.
Cryptocurrency has followed an eerily similar trajectory over its first decade. The initial whitepaper triggered waves of interest and grand hopes for remaking finance and economics. But irrational speculation soared far above early technical realities on the ground. The ICO craze and 2017 crypto bubble exemplified this groundless euphoria. When the house of cards collapsed, the trough of disillusionment was deep and widespread.
Yet today the technology continues progression along its hype cycle in spite of setbacks. The excessive greed and hype of Bitcoin ETFs and token manias has given way to more sustainable, regulated growth. Pioneering applications like decentralized finance are finding practical niches while developers build for the long-term. Cryptocurrency is experiencing the same rise and fall of expectations that accompany every truly disruptive innovation through history.
None of this excuses the real harms from criminal exploitation and lax governance. Enormous potential remains hampered in the short-term by volatility and speculation. But like the internet, stabilization around pragmatic use cases is slowly emerging from the wreckage of initial hyperbolic promises.
The years ahead will be defined by finding the plateau of productivity where cryptocurrency can sustainably empower individuals and businesses rather than unreliable dreams of rapid wealth. This requires carefully implementing lessons learned from past excesses as the technology continues evolving. With rational optimism and ethics, the hopes kindled by Satoshi Nakamoto’s vision can endure. The hype cycle inevitably continues.