The Crypto land grab concept and technological displacement

At RealVision, we have a whole group and a whole suite of video interviews dedicated to Crypto. But I am considered a macro guy at RV. And so, I try to stay out of the crypto side of things except to the degree it relates to traditional finance and macro.

But I have views on Crypto because it's a space I have followed for almost a decade. And so, as this market hots up, I've decided to outline my current thinking. That started with my Friday post on how Crypto represents a sea change in how we gain trust.

I am going to follow on today since I told you yesterday I think this ends in a mania, and that manias end with a pop not a fizzle. A lot of people are going to trampled. But I think the technological change will continue apace even so.

The Internet Land Grab

I was debating how to start this post and decided to home in on the Internet bubble as a starting point because I was making the case on Friday to draw parallels today to how things played out in the late 1990s. And I was thinking about what I was reading back then.

One book called “Residential Broadband – An Insider’s Guide to the Battle for the Last Mile” had a big impact on me. In it, Kim Maxwell lays out the case for thinking about residential access to high speed Internet as a key variable in shaping Internet business models. The view he presented was one where legacy infrastructure was insufficient to transmit the most precious data and information we bought and consumed. And so, there would have to be a massive upgrade of that infrastructure to facilitate the transfer speeds necessary to make us less dependent on the physical media storage of digital information, allowing 'virtual' business models to flourish.

In hindsight, this is probably right. Bandwidth has been a key limitation because virtual consumer business models need bandwidth to more fully replicate what used to be done in the physical world and supersede those physical-only business models.

But if you think back to the late 1990s, as the Internet frenzy was occurring, there wasn't a whole lot of talk about bandwidth limitations. I mean, how are you going to scale when you can't reach enough customers with the bandwidth to have a robust Internet customer experience? When you're burning through cash to scale like Pets.com or Webvan, that's a problem. And eventually those companies went bust as a result.

It wasn't the business model that was suss. Chewy does today what Pets.com wanted to do. And Amazon Fresh does today what Webvan wanted to do. It was the fact that the 1990s Internet wasn't sufficiently mature to support their business models at scale. Even so, there was a frenzy, a mania in the 1990s as this new technology caught everyone's imagination.

If you think your industry has first mover advantages though, you're going to want to try and scale before the mania is over. Otherwise, you might be locked out of an opportunity. So, there was an Internet land grab. And it was inevitable that some of the ideas were half-baked. Some of the business models were premature or simply impractical. Innovation is not about perfect foresight. A lot of it is trial and error. So as an entrepreneur you have to be willing to take risks. But, since eventually bubbles blow up, a lot of companies went bankrupt and a lot of investors were left licking their wounds.

The Crypto Land Grab

That's how I am thinking about Crypto. Here's a question for you: Is Bitcoin going to be the digital asset store of value of choice twenty years from now? A lot of people are betting yes for a host of reasons. Preston Pysh gave me some good ones when I interviewed him in March. But, of course, we don't know the answer to that. I was at Yahoo in 2002. And if you had asked me then who would win search, I would have said Yahoo. But I would have been dead wrong.

I would posit that when we look at the Crypto space, we really don't know which businesses will survive, which businesses will thrive, or even what use cases for Crypto will become winners in 5, 10 or 20 years hence. We can postulate. But we can't really know. For example, on Friday I made the argument that Crypto is principally about de-centralized transaction and ownership verification, not about alternatives to government money. And so, I am betting that use cases that revolve around ownership, verification and trust more broadly is where we're headed in Cryptoland rather than money trust use cases more narrowly. But, I don't know.

And neither does anybody else. So, just as with the Internet in the late 1990s, there's a land grab. If you think your space in Cryptoland has first mover advantages, you're going to want to try and scale NOW, before the mania is over. Otherwise, you might be locked out of an opportunity. It's exactly the same dynamics we saw in the late 1990s with the Internet. And we know how that played out.

One interesting wrinkle is that after the Internet bubble, retail investors, chastened by their losses, receded from view as a dominant force in fundraising. Doing a couple of seed rounds and then going public as soon as possible wasn't seen as the way forward anymore. Instead businesses were nurtured as private companies for much longer, with venture capitalists providing the money. And when these businesses have gone public, they are much more mature and much more likely to be profitable than they were twenty-some years ago.

That means retail investors playing the Crypto game or the 2021 version of the IPO game with Spacs and direct listings are getting more mature businesses. And the corollary of more mature businesses is less growth and less upside but potentially less downside risk too. A lot of the gains have gone to the VCs. I don't know what that means for retail investors when the bubble pops. I hope it means fewer losses. We'll have to wait and see.

My View

I am titling this last section, "my view" because that's what I always do. But really, the proper title is "use case speculation" because I want to go back to this debate about what Crypto is good for.

Back in 2014, I wrote a post called "Walbucks: Bitcoin for Walmart". It was a bit cynical because the idea centered on Walmart creating a digital scrip using Blockchain that created an even more captive customer and employee base. I didn't think they'd do that - and they didn't. But it goes to how I have been thinking about Crypto all along.

I don't think government will cede control to Crypto on the money side of things. This is a huge debate and I am going to simply gloss over it. But, my view is that governments in the richest countries simply have too much power for Crypto to replace them. The concept that we will soon be free of fiat is pie in the sky in my view. If threatened by Crypto, Governments of the richest countries will simply use taxes and regulation to thwart widespread use of Crypto as money in their domains. And given government's ability to imprison, I suspect this will be a strong deterrent.

So, the 'money trust' view of Crypto is too narrow. Crypto is about creating trust without needing a centralized trust agent to verify transactions or ownership. Yes, an airline could be the owner of a new Blockchain-based network for airline miles. And they could potentially create more miles at will, but you can still have an airline miles network on the blockchain that allows transfer of ownership without any centralized verification. And so when you think of Crypto from that perspective, you come up with a multiplicity of use cases.

There are lots of middlemen in the physical world whose sole job is to verify transactions and ownership. And many of these middlemen are paid handsomely for their work. So, if you can create a virtual and distributed trust network, that's a threat to those business models. It's a case where technology suddenly threatens the jobs of a lot of higher income professions. That's the world I see shaping up. And, of course, as with technological displacement lower down the income spectrum, that's going to be a political issue, but with special interests that have more money.

I am going to leave it there for today. I hope you enjoyed this post. It's not my usual fare but it's something I think will end up being very important.