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How wilting investor enthusiasm will revive innovation in the cryptocurrency ecosystem

The crypto bear market can be depressing. It feels that all the excitement and hope is gone. In our view, however, the converse is true. In this article we will first examine the current bear market and argue why it creates an ideal environment for progress and innovation.
 
Doom and gloom
The total market capitalization of all cryptocurrencies has dropped this year from a peak of more than $800 billion on January 7 to less than $200 billion as recently as August 14. Google Trends maps a corresponding diminishment of interest. Even big ticket news items, such as Intercontinental Exchange announcing the forthcoming launch of Bakkt, a digital asset platform backed by Starbucks and Microsoft, barely moved prices. And, of course, the inevitable Bitcoin obituaries have begun to emerge en masse.

Those who invested close to the peak bemoan dramatic losses and lessons (we hope) learned. We hear stories of those who, following the unwise hype of the crowd, took on debt only to incur huge losses almost straight away. Blinded by greed or envious panic, these investors failed to follow this simple heuristic of high-risk investing: do not invest what you can’t afford to lose. While folly created them, the consequences are too harsh to make light of. It is only a shame that these tragedies are unlikely to deter the next round of lemmings ready to topple over the peak of some other future bubble chart.
 
Fear, Hope, And Human Nature
Meanwhile, many investors continue to hold on, either due to blind hope, genuine belief in the promise of the technology, or because they have seen the logarithmic patterns behind bitcoin’s previous growth: This has all happened before, and it will all happen again. At the time of writing, total market capitalization is still almost $50 billion higher than this time last year, and daily trading volume is close to triple, according to CoinMarketCap.com.

Telegram groups and Reddit threads are overrun with a mix of optimistic predictions and doom-laden hand-wringing regarding what is next for the market. Investors scrutinize each new review of exchange-traded fund proposals, debate what factors will finally bring institutional money in, and wonder at possible price manipulations as Bitmain prepares for an IPO. All of these factors are fair to examine, and I like to think that these theorizers are motivated by their belief in the technology rather than merely clinging on to delusion-born shattered dreams. But the truth is: if you believe in the technology, then the market can wait.
 
A Change of Tone
There was a brief period at the end of last year and the beginning of this year where it seemed you could barely move without hearing someone wax lyrical on the promise of blockchain. Yet most had come to the technology only because of the market hype and short-term financial opportunity: When the market crashed, the talk vanished. Bring up crypto with a stranger and no longer will you confront a dynamic spray of jubilant pontificating. Rather, you might just meet a cold gaze amid a cloud of anxious silence or else gleeful (and premature) schadenfreude.

With one exception: While memes abound mocking speculators who claim they are only “here for the technology,” bear markets have a tendency to clear away those who aren’t. If you talk to serious techies and their business counterparts – those who have endured through all the ups and downs – their passion for the blockchain’s world-changing potential hasn’t changed at all. While price fluctuations may have done some financial damage, the environment has become more hospitable to trust, hard work, and genuine innovation.
 
So What’s The Good News?
Firstly, we will see far fewer (for now) of what I call “Why blockchain?” projects. These include the likes of Dentacoin, the “blockchain platform for the global dentist industry”, which at its peak had a market capitalization of over $2 billion, and Potcoin, which “provides banking for the cannabis industry”. Such initiatives, in the opinion of this author, have been unable to provide a rational for their use of blockchain technology – beyond, of course, the financial opportunity presented by recent frenzied speculation.
I will not go as far as to assert that these projects are pure scams. I will say that the incentive behind the creation of far too many tokens has been a result more of opportunism than credible use cases. As the market gets less frothy, a higher proportion of projects will emerge from practical rationales, and this can only be a good thing for innovation. Incidentally, and perhaps worryingly, for those concerned with the direction of the market: Dentacoin still has a market capitalization of more than $100 billion.
As one testament to the market’s change in dynamic, we can look at the planned sale – via an ICO – of New York’s Plaza Hotel. First announced in March, the idea to sell a large portion of the hotel on the blockchain lacked a clear rationale beyond “blockchain” and “cryptocurrency” being hot words for attracting investors. As of August, it is already reported to be failing. Does this mean that there is no use case for blockchain in the hospitality industry? No, the point is that the changing market will force entrepreneurs to be more careful about their use of blockchain technology: only using it when it is, well… useful.
 
Blockchain is Trustless; Speculators Can’t Be Trusted
Last year’s bull run brought an army of what you might call cottage-industry bottom feeders to the cryptocurrency landscape. Having a blockchain reference in my job title on LinkedIn led to a surge of unsolicited messages, which at one point peaked at dozens daily. They were pitching ICOs, or else pitching to help me with my ICO, or to join a pool, or to build out my “tokenomics”, or to moderate my Telegram channel, and so on. They may have saved themselves some time if they had looked at my profile long enough to learn that I was not running an ICO, nor did I have a Telegram channel. No points for attention to detail. But as the old saying goes, when there’s a gold rush, the ones who make the money are those selling the picks and shovels.
Much in the same way that not all ICOs exist to exploit a frothy market, not all pick-and-shovel salespeople are bad actors. But many are. And many, I have come to understand, do not have strong services to offer, but are damned sure happy to charge exorbitant prices. This breeds an environment in which it is extremely difficult to build trust with others in the value chain. As a weaker public market trudges along, the purely exploitative get bored, and tighter budgets mean only those who can deliver genuine value will stick around. Those who do – and the people they help – will likely, in the long run, be rewarded.
 
What About The Money?
So a bear market doesn’t only shake out weak hands. It also clears the landscape of many of the all-too-common “Why blockchain?” projects. Moreover, bad actors will soon get bored and move onto the next quick-buck opportunity. The landscape is getting clearer for genuine innovators to work hard at developing their tech, building great teams, and driving real adoption. But doesn’t this also mean that entrepreneurs with genuine visions are now going to have a harder time raising sufficient capital? After all, we are now seeing many companies delay their ICOs.
Perhaps there is some truth in this. But it is also true that pre-ICO investment, particularly from venture capitalists, has been going through the roof this year. Good projects, with great teams and real use cases, will raise money just fine.
 
But What About The Tech?
Finally, with so many investors burned, won’t this set back mainstream adoption of cryptocurrencies? Well, as we have seen via the never-ending cycle of Bitcoin obituaries, the mainstream tends to have a short memory with these matters. There are always new folks who will be ready to get burned, and if a technology is useful, people will use it. Just as I am certain that the current, ongoing market bust does not preclude the possibility of yet another bubble, I am confident that the right mix of technological innovation and marketing savvy will be sufficient to drive widespread adoption. If the world needs it, that is. And that is the trillion dollar question.
What do you think: Was the bubble market bad for innovation? Will a long-term bear be worse? If/when another major bull run arises, how can we mitigate against the challenges to innovation? Don’t forget to  share the article on social media to stir the debate.

Five things most ICOs get wrong, and what they should be doing instead

As per Coinschedule, ICOs have seen an astronomical year on year growth in 2018.  In amongst them are some truly groundbreaking projects who have launched their funding rounds with impeccable professionalism.  However, there are also an increasingly familiar set of easily avoided mistakes that many ICOs are making. In this article we identify the top 5 mistakes ICOs are making and provide some easy steps they can take to avoid them and improve their chances of success.

1. High valuations are not conducive to long term success. Buyer beware.
YouTube built their initial product with less than $1m of angel funding and their first VC funding round was only $3.5m.  With this they built one of the most widely used and successful products of all time. Meanwhile the average ICO is now raising over $10m.  
It should be no surprise therefore, that the average ICO in 2018 is now delivering a negative return on investment, with the average token launched in 2018 being worth less now than during the ICO.  There is no doubt that recent adverse market conditions have had a role to play in this, but it is certainly also a function of the unrealistic valuations being placed on new blockchain projects.
These deflated returns don’t just damage investor confidence, but they also damage the project.  Projects that see their token price plummet after ICO quickly lose momentum and face an atmosphere of negativity and disillusionment from their stakeholders.
The antidote to this problem is simple.  Organizations running ICOs should be asking for the amount of money they need.  This should not be guesswork either. Like any investment, the management team should lay out a clear, carefully itemised business case explaining exactly how the money is spent and why that particular figure was chosen.  Raising the minimum amount needed to build and market their product would in general yield much lower hardcaps than $10m, which would allow much more headroom for growth and take pressure off the initial growing phases of the project.
2. Rely exclusively on traditional marketing channels at your peril
Often one of the biggest costs that ICOs usually incur if they are to be successful is marketing.  However, millions of dollars is being poured into strategies that aren’t working. Organizations running ICOs are often dedicating the vast majority of their budget to banner ads, YouTube ads, Google AdWords and advertising on mainstream platforms like Facebook.
Of course, all of the above should be part of any successful ICO marketing campaign, but alone they are very unlikely to be enough to fill a multimillion dollar hardcap.
To be successful in the unique world of cryptocurrency investment, organizations running ICOs need to spend as much money and attention on the specific channels used by crypto-enthusiasts such as Reddit, BitcoinTalk and Telegram.  Not only do these channels tend to be the key areas where new ICOs gain publicity, the metrics associated with them are often used by investors when evaluating whether a project is gaining traction. Numbers of Telegram subscribers and regularity of Reddit activity, for example, are often seen as key metrics of how much hype an ICO has achieved.
Organizations running ICOs should adopt tailored strategies to these channels.  Airdrops and lotteries incentivising Telegram sign-ups and Reddit posts have both proven to be successful techniques, whilst having an active moderation and engagement plan helps convert these followers into an engaged community.
3. Tenuous advisors and influencers who lack credibility can make great projects look like scams
It has become a truism that ICOs need to have an “all-star advisory board” in order to be successful.  However, there is a series of mistakes that is being made over and over again when assembling advisors for blockchain projects.  Firstly, many projects are taking on advisors with no real meaningful connection to their project. These are often perceived big-names in either the crypto sector or the investment world, but with no link to the actual market sector the ICO is targeting.
When selecting advisors, organizations running ICO should consider 2 questions:

Does this advisor have market-specific knowledge that can be applied to give meaningful advice to the specific niche in which our project is operating?
Does the advisor have a network that could provide introductions that would lead to potential users, customers or partners?

If the answer is not “yes” to at least one of these, then they should not be on the Advisory Board.
Equally, organizations running ICOs should tread very carefully before entering into the devil’s bargain that working with celebrity influencers represents.  Whether they are cryptocurrency-specific influencers or broader celebrities, whilst such influencers may bring heightened awareness to a project, they also increasingly damage their credibility.  Remember that by tying your projects name to an influencer you are tying yourself to their reputation, which is something very fickle in the current cryptocurrency market. Growing a community organically through creating high-quality content that is relevant to your market niche and fostering interaction through your own social media channels will set projects up much better for long term success
4. Like it or not, have a solid strategy for exchanges or be forgotten
It is seen as something almost beneath them by many organizations running ICOs to reserve a budget for getting listed on major exchanges.  Its true that decentralised exchanges such as IDEX are delivering increasingly large volumes and the fees for getting listed on major exchanges are extremely high.
However, the stakes are equally high.  Tokens simply cannot achieve sufficient levels of demand to achieve steady price growth without being listed on a major exchange.  Being listed on one of the big exchanges also brings increasing awareness to a project and an air of credibility. Ultimately, volume on exchanges leads not just to price increases, but also to wider adoption of the token, which should be the holy grail of every blockchain project at this juncture in history.  Simply hoping that exchanges will list your ICO amongst the sea of projects being released each month, without a clear strategy is naive.
It may be seen as controversial, but the most successful ICOs now are pencilling fees to get listed on the likes of Binance into their budget and it is one of the investments that sees some of the most immediate and high impact returns for the project.
5. Projects that do not invest in water-tight regulatory compliance are exposing themselves to major long-term risk
With July’s G20 deadline for introducing cryptocurrency regulations fast approaching, regulation will continue to be the number one hot topic for the blockchain sector in 2018.  Regulations should ultimately breed certainty and investor confidence that will allow institutional money to flood in and provide major long-term benefits to the sector.
However, in the short term it will increase the risk of ICOs falling foul of regulations.  The SEC has already issued a number of subpoenas to ICOs this year and this trend is only likely to increase as regulations are increasingly formalized.
Along with investing in the right product strategy and team, the right marketing channels and exchange listings, it is highly advisable for every organization running an ICO to reserve a sizeable legal budget for ensuring that their project is meeting all current and anticipated regulatory compliance or risk see all their hard work go up in smoke as the regulatory net closes in.
Final Thoughts
To conclude, there are many factors that go into an ICO’s success, which extend far beyond the quality of the product and the team.  These seeming superficial factors can be the difference between a great project succeeding or failing at ICO. The common mistakes that are being made are easy to solve.  Set a needs-based valuation with a clearly itemised business plan, have a detailed strategy for social media marketing channels such as Reddit and Telegram, only take on advisors with clear links to your market segment and reserve budget both for exchange listing fees and regulatory compliance.  All this will ensure that your ICO is given the chance it needs to succeed and maximize the likelihood of not just your funding round being a success but of the long-term success of the project itself.

So what exactly is the deal with Japan and cryptocurrency exchanges?

On Friday, Japan’s Financial Services Agency (FSA) issued business improvement orders to six licensed cryptocurrency exchanges. The orders followed on-site inspections and are the latest in a long line of regulatory actions the FSA has taken with regard to exchanges. The orders have impacted big players, like BitFlyer, which has suspended the creation of new accounts while it works on improvements. Some have noted a correlation with an 8% tumble in Bitcoin’s value. Yet while the market may read the actions as negative in the short-run, there is good reason to believe that Japan’s complicated relationship with cryptocurrency is a good thing for the industry long-term. In this article we will explain the story so far and what it means for the industry.

Humble Beginnings
In April last year, Japan made the pioneering move of officially recognizing Bitcoin as an asset and a method of payment. It also required that cryptocurrency exchanges must register with the government and meet stringent technical and KYC demands to continue operating. In September, the government recognised eleven companies as registered exchanges (after receiving more than fifty applications). It recognised another six in May this year.
Japan was a pioneer, becoming the first country to oversee cryptocurrency regulation at a national level. Why? Did it want to prevent the embarrassment of another MtGox-style hacking scandal? Was it to seize upon the rare competitive gap opened up by China and America’s ambiguous stances towards cryptocurrencies? Perhaps Japan simply wanted to protect its citizens, keep money laundering at bay and drive innovation in a burgeoning space? Or could it have been, as some say, due to pressure placed on the government by Japan’s huge forex industry, whose companies rightly saw cryptocurrency exchanges as a threat to their existing businesses and wanted to slow them down so they could play catch up?
 
Trouble Brewing
Perhaps it is all of the above. Whatever the case, life has not always been smooth sailing for cryptocurrency exchanges in Japan, who in April this year were reported to have more than 3.5 million traders (and who allegedly accounted for 40% of daily trading globally last year). Existing exchanges had to invest both heavily in order to gain acceptance. One exchange was rejected. In April, US-based Kraken withdrew from Japan.
In June, Hong Kong-based HitBTC suspended its services to customers based in Japan. Both companies cited the difficulties of conforming to Japanese regulation. Meanwhile, in March, Japan’s FSA issued a warning to Hong Kong-based Binance for operating in Japan without a license. Kraken, HitBTC and Binance are among the top fifteen exchanges in the world by trading volume. They do not lack resource. Are Japan’s regulations too demanding, or is the rest of the world not being demanding enough?
Enter Forex
Meanwhile, Japan’s big forex and tech players have been entering the market, bringing big resources and customer bases, and ratcheting up the competition, including GMO Internet’s GMO Coin, SBI Group’s SBI Virtual Currencies; DMM’s DMM Bitcoin. Money Partners Group has invested in Kraken and Tech Bureau, which operates Zaif, and Yahoo! Japan bought a 40% stake in bitARG. Japan’s largest bank, MUFG, is also getting stuck in. Finally, following a major hack in January on Tokyo-based exchange Coincheck, the Japanese online brokerage Monex Group has confirmed that a deal in place is acquire the embattled exchange.

The Coincheck hack itself, in which more than $533 million worth (at the time of the hack) of NEM was stolen from digital wallets (making it bigger than MtGox), has brought more difficulty to the landscape. Following the hack, the FSA tightened regulation, requiring, among other things, that exchanges do not store tokens on internet-connected computers, must verify customer identity for major transfers, monitor account balances several times a day and establish rules to prevent officers from using client funds. Since the hack, the FSA has punished seven exchanges, ordering two of them to suspend business.
 
Meanwhile, Elsewhere
At first glance, the story of cryptocurrency exchanges in Japan looks like a train wreck in slow motion. Start-ups are being forced to prioritise expensive compliance over innovation. Incumbents are capitalizing on stringent regulations in order to muscle in on a dynamic marketplace. Japan is finding itself home to a huge hack in spite of all the regulation. Earlier this year, Japan’s sixteen licensed exchanges formed a self-regulatory body, but given the high level of competition and lack of transparency between exchanges. Coherent action may be easier talked about than delivered.

Another perspective might be that such chaos is inevitable in such a disruptive space and that Japan is merely ahead of the curve. Last week, Jay Clayton, the chairman of the US’s Securities and Exchange Commission, alluded to his frustration regarding exchanges operating in America, who have had a very limited dialogue with the regulatory body. Yet while the SEC has emphasised that cryptocurrency activity can be assessed within the framework of existing regulations (securities regulations, in particular), opinions differ as to how those regulations apply to the unique nuances of cryptocurrencies. Meanwhile, rumours emerged last week that China is in the process of establishing state-backed cryptocurrency exchanges that will enable the trading of Chinese tokens. How will the landscape change as the regulation in these countries cements itself?
 
Lessons Learnt?
It is likely that in these countries and others, clearer regulatory frameworks will emerge, whether via statements, documentation or direct legal action. Those exchanges who have not been able to arrive or survive in Japan will begin to face similar challenges on a global scale. The exchanges already operating in Japan, on the other hand, have already made headway to meet the high standards that may eventually be expected on a global stage, meanwhile making Japan one of the safest places to trade in the world.
A similar position has been taken by Yuzo Kano, CEO of BitFlyer, one of Japan’s largest cryptocurrency exchanges, who sees the work done in Japan as an ideal platform for further international expansion.
Japan has learned some hard lessons. While its journey has led to considerable difficulties, and there is still some way to go, it has also created opportunities for the Japanese government and entrepreneurs to capitalise on the steps it has taken so far. The Japanese government itself would be wise to use the stringency of its regulation to attract foreign investors to the market, offering more incentives for foreigners to use Japanese exchanges and perhaps offering high value visas for full-time traders who wish to move to Japan (and take advantage of its trading infrastructure). Japanese entrepreneurs would be wise to use their hard won developments within Japan to bring secure, reputable cryptocurrency trading opportunities to foreign shores.

The ecosystem is moving forward. Japan is home to some of the smartest and most active cryptocurrency entrepreneurs I know. OmiseGo has launched a blockchain co-working space in Tokyo. Hotaru has been supporting small start-ups and big companies alike, all of which are unified in using blockchain for high-impact, world-changing projects. Coinbase is coming to Japan.
Unlike MtGox, Coincheck is still in business. It has paid out nearly $435 million to investors, less than the full value of the initial loss, but higher than the market price of the token at the time of the refund. With so much competition, especially from big budget incumbents, there are sure to be more bloodbaths ahead, but the Japanese cryptocurrency trading market is proving itself to be more robust than it first appeared.