Bursting Bubbles with Falling Knives! Have we created a Global Casino?

 

If you’ve been paying any attention at all to the recent headlines describing the rise and fall of Bitcoin and hundreds of other digital currencies, it’s only natural to wonder whether the coverage could possibly be any more sensational. Just weeks ago, we were teased with headlines that predicted that Bitcoin’s price would soon reach $50,000. Many of those same media outlets are now bombarding us with headlines that are equally as dramatic – but with a far different tone:

 

“Bitcoin Sinks…”

 “Crypto Carnage…”

 ‘The Bitcoin Meltdown…”

 “Bitcoin Prices Plunge…”

 

You get the idea. Unfortunately, it’s easy for some people to read headlines like that and come away with the impression that the digital currency revolution is dying a quick and messy death. Sensational headlines can have that affect on the public consciousness, especially when that public sees similar reporting from multiple sources.

Still, it’s important to keep things in perspective. The fact is that news media outlets love dramatic events. Drama sells newspapers and attracts viewers to news broadcasts – and that’s important for those businesses that make their money packaging the news. With that in mind, it’s vital to look past the sensationalism and think critically about what’s really happening in the industry.

With that in mind, what is really going on with digital currency? Was it really all just a once-in-a-generation bubble that was always destined to collapse and fade into the misty haze of history? Or is digital currency a real innovation that will spark the next great technological revolution and positive change for people around the world?

None of us can deny that the industry seems to be struggling right now. As I write these words, Bitcoin’s price has fallen to below $10,000, roughly 50% lower than its December 2017 high mark. (Wait… that was 4 hours ago, and now it’s back to $11,600) Viewed without context, that decrease in price might seem dire indeed. And make no mistake: those falling prices are truly distressing for those who bought into the Bitcoin market at or near those record high prices.

Given all of that, it’s easy to see why many people might wonder whether we’ve created something that is more akin to a global casino than a true financial services innovation. It’s difficult to argue with that assessment, given the rampant speculation in the digital currency markets, and the fact that so many of today’s digital currencies seem to be doing little more than treading water on the innovation front.

Many in the media have been waiting for the current cryptocurrency “mania” to collapse in on itself. Memories of the Mt. Gox debacle still linger in their minds, and some believe that a similar fate will eventually befall an even larger segment of the digital currency industry. That disaster provided those media outlets with no shortage of sensational headlines, after all. Imagine the stories that would emerge if the entire digital currency space collapsed in similar fashion! They practically write themselves.

To be fair, there’s reason to believe that some segments within the industry may collapse. Not in the way that Mt. Gox fell from its lofty heights, mind you -  but that won’t make the collapse any easier to stomach. The problem is that the current environment does seem at times like nothing more than a giant casino. That’s a danger that we need to recognize and move to counter if digital currency is to ever realize its true potential for creating positive change in the world.

Take initial coin offerings (ICOs), for example. In recent years, cryptocurrency startups have raised more than $4 billion using ICOs. That’s an enormous amount of money, and it helped to create many millionaires seemingly overnight. How is that even possible, you ask? It’s apparently easier than you might think.

All you need to do is create a great idea revolving around digital currency or the blockchain, and then compose a white paper to sell that idea. Follow that up by creating a new coin, and pre-mine a large block of your new digital currency tokens.  You then sell a portion of those coins as ICO tokens, and retain the rest for insiders and advisers – coins that can be sold in the digital currency markets after the prices are inflated. It’s a pump-and-dump scheme that can quickly enrich unscrupulous “entrepreneurs” who are willing to take advantage of the current wave of digital currency enthusiasm.

Unfortunately, these types of schemes are continuing, despite a recent warning from the SEC Chairman that ICO tokens share all the characteristics that define securities under U.S. law. That’s made these funding vehicles a source of controversy, as I discussed in my recent article, The ICO Conundrum: A Challenge Beyond the SEC Mandate.

There’s irony in all of this, of course. When Satoshi Nakamoto created Bitcoin back in 2009, he hoped to replace the banking system that many of us find untrustworthy and largely inscrutable. He was convinced that fiat currency could no longer serve as an optimal monetary system, and that inspired him to write the white paper that would eventually result in the creation of the first modern decentralized digital currency.

That paper, “Bitcoin: A Peer-to-Peer Electronic Cash System”, made a compelling case for implementing a new digital currency payment system that could allow two parties to send direct payments to one another or store money without relying on banks or other financial services. This innovative idea opened the possibility that people could eventually be their own bank, and no longer need to pay third parties for the privilege of securing and managing their money. Bitcoin was a proof of that concept, and it works.

But – and this is where the irony comes into play, Bitcoin and many other digital currencies have failed to live up to that potential. In fact, in many instances, they have turned out to be just as untrustworthy as the existing fiat currency financial system. Digital currency’s great potential has been largely squandered.

To be sure, there are notable exceptions. Factom, which is committed to providing organizations with trustless data management solutions appropriate for the era of Big Data and rapid technological innovation, is one such example. So too is DNotes, which has created a complex ecosystem committed to creating real change in people’s lives, greater access to effective financial services, and expanded opportunities for inclusion in the global economy.

Sadly, worthy projects like those are rare in today’s digital currency landscape. The prevailing mentality throughout much of the industry is driven by a get-rich-quick philosophy that has seen far too many people invest blindly in hopes of selling their holdings to an even bigger fool at some future date. That is troubling, since it means that the industry has effectively allowed itself to be transformed into a global casino.

And here’s the problem with that: gambling is a fickle thing. While there are those who see Lady Luck’s smile on those rare occasions when they hit the casino jackpot, there are far more who lose everything that they have. And even though professional gamblers may have well-developed strategies that can improve their odds of winning – by taking advantage of the laws of probability, they are still as vulnerable to the whims of chance as any first-time player.

Yes, even the best gamblers can go bust if they experience a lengthy series of losses.

The question is, though: does investment in digital currency need to be a gamble? After all, we invest in other types of assets all the time – stocks, bonds, precious metals, and so on. How many of us do so with any thought that we’re putting everything we have at risk? Truth be told, few of us consider the average investment to be much of a gamble. Sure, some investments don’t pan out as well as others, but those risks are generally minimized with sound research and prudent investment strategies.

Of course, that requires that we do our homework and understand the things that we’re investing in. Before you invest in any idea, you need to research it to verify its track record and history of accomplishments. You need to truly believe that it is worthy of your trust and your money. That strategy is being ignored by far too many of today’s digital currency investors.

Too much of today’s cryptocurrency investment mindset is motivated by what former Federal Reserve Chairman Alan Greenspan once described as “irrational exuberance.” While Greenspan used that phrase to describe the dot-com bubble that inflated markets in the 1990s, it’s not difficult to see that the term is equally fitting for today’s digital currency markets.

As troubling as the digital currency space’s current casino-like atmosphere might be, however, that atmosphere could create even more trouble for the industry. Because technology tends to evolve and get out in front of regulation, regulators are often slow to react to these types of changes. Unfortunately, by the time they do react, they sometimes do so with a heavier hand than the situation might warrant.

In this case, there are several factors that could cause regulators to move too far, too fast, and with too much force. First, there is the industry’s high-risk, gambling mentality – something that is almost certain to give regulators pause. In addition, the industry has seen its share of bad actors and disregard for existing security laws. Finally, there is a general lack of familiarity with the technology on the part of many government officials and regulators.

Any or all of those factors could lead lawmakers and bureaucrats to over-regulate the industry, effectively stifling innovation. In my opinion, that would be tragic. For while the digital currency industry is currently experiencing tremendous growing pains, that doesn’t change the fact that we are now witnessing the greatest technological revolution since the dawning of the internet age – with an opportunity for the world to experience the same type of explosive increases in jobs and wealth creation.

That’s a once-in-a-generation opportunity that we cannot afford to miss.

So, have we created a global casino? To a certain extent, the answer is almost certainly “yes.” It would be naïve to look at the current environment of rampant speculation and deny its resemblance to those gambling venues. Still, we must remember that there is more to this technology revolution than meets the eye.

Digital currencies like DNotes will continue to push the envelope, charting a different course - one that builds the foundation for a trusted digital currency that is both verifiable and inclusive. A digital currency that is accessible and functional for every person in the world, serving as a supplement to traditional fiat currencies.

Meanwhile, Bitcoin will survive, and will almost certainly thrive in the years to come. It will not be shut down, but it also probably won’t ever achieve Satoshi’s real objectives either. And while steps will be taken to rein in the casino-like atmosphere that has arisen in many areas of the crypto space, that action won’t stop the digital currency revolution.

We’ve already crossed that Rubicon. The die is cast, and the technology and ideas are here to stay…

… no matter what the latest headlines might say.

Author: Alan Yong

DNotes co-founder Alan Yong is a well-regarded author, tech visionary, and entrepreneur who established Dauphin Technology in 1988.

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