To understand blockchain and cryptocurrency and how they might apply to real business situations today, I decided to research these two technologies. I wanted to understand it well enough that I could explain it to another business leader.
I must admit, it took many hours to sift through volumes of online information to find relevant information and my research continues. With over 4 decades of technology business experience, I expected that it would be simple to understand these new technologies. Not so. I found myself re-reading many descriptions from various experts multiple times. I found most of the online information describing technology with little to no real business application.
Applying traditional business principles, I looked for answers to questions that normally stated when introducing something new. I looked for answers to questions on; business value, business problems being solved, improvements to what exists today, clear descriptions for real business benefits, ROI (Return On Investment) that these two technologies promise to deliver. I quickly realized that to understand answers to my questions, I had to focus separately on cryptocurrency and blockchain. Although they both started together, they quickly evolved into two separate streams.
In this article, I will share my perspectives on cryptocurrency first and will expand on blockchain technology in subsequent articles.
To understand the real business value of cryptocurrency in solving today’s problems, I examined the “What Is” today which covers our current currency and associated processes and “What Will Be” with the new alternative cryptocurrency referred to as digital tokens. Let’s begin.
Today’s legal tenders – Today according to Wikipiedia there are around 180 currencies that are recognized by the United Nations as legal tenders. That is a fairly large number of currencies. Processing buy & sell transactions globally is cumbersome. Many banks and currency exchanges are involved. No doubt, the world could use a simpler process.
What Will Be
Cryptocurrency – According to https://coinmarketcap.com/all/views/all/ as or March 1, 2018, there were 1,527 new cryptocurrencies and the list is growing. That’s almost 8.5 times the number of legal currencies we have in the world today. I am not a banker but this fact raises a red flag for me. How is a higher number of alternative currencies a better solution to solving today’s currency problem?
Cryptocurrency Stability – It’s a widely known fact that all cryptocurrencies are experiencing frequent value fluctuations. According to Coinmarketcap , the top listed digital tokens have experienced fluctuations of +/- 15 % in a single week or less. Why do these tokens fluctuate so much? Unlike today’s currencies whose value is tied to the country’s economy, the new digital tokens don’t have economic assets to tie its value to. So why do they fluctuate?
How tokens are generated – To understand the reasons for value fluctuations, let’s first understand how these digital tokens are created. Unlike the present legal tenders where the country’s central banks print new currencies, new digital tokens are generated by specific and often customized blcokchain system software. Recently, I witness a new ICO (Initial Coin Offering) launched by a startup company. They followed the new industry rules and configured their blockchain system to hold for release a maximum of 100 million tokens. During the ICO, a percentage of these new tokens were sold to investors in exchange for real US dollars and other more popular tokens.
Reasons for Fluctuations – Within few days this startups new token fluctuated between – 8 % and + 6%. Nothing changed in the new startup business to drive this fluctuation. The only explanation is, speculators who purchased these tokens drove this roller coaster ride.
To understand the reasons better, I researched the process used to launch an ICO. There are many new experts who advise on what it takes to launch an ICO. Basically, to launch a new ICO, the company founders need; white paper, purpose of the token, great team, select which token technology (blockchain system) to use, execution plan (not a business execution but a token structure),and marketing plan (most focus on marketing to cryptocurrency audience). Sadly, what I did not find is a need for a business plan. A plan that defines what the new startup business is about, its products, business problems being solved, target markets, revenue projections, business strategies, competition, risks, execution plan and so on. Unlike in an IPO (Initial Public Offering) for a startup company, business plan does not seem to be a necessity.
Given these facts, I see a major disconnect between the new digital currency issued during an ICO and the new startup core business. One has almost nothing to do with the other. Let’s examine this further.
Conflicting objectives – One of the key reasons that startups launch ICO’s is that their new blockchain based business requires a digital tokens to process paid transactions. Startup can use already existing digital tokens but they chose to introduce their own tokens to raise real currency funds. These new digital tokens hold no value. Investors receive no shares in the startup business. They simply hold new digital tokens.
Since the cryptocurrency investors (I call them speculators) hold no shares in the new startup, they want their digital tokens to increase in value. That is the only way these speculators will earn money.
The new startup’s business uses their digital tokens to process paid transactions. Sellers who use the new startups system, will price their products and services using the new digital tokens. To make their products and services attractive, they depend on stable digital tokens. Significant fluctuations in digital token value will severely impact the seller’s product and services. It’s hard to imagine buyers wanting to buy a sellers product or service when their prices fluctuate often and significantly.
The new startups now face a no win situation. It’s impossible to satisfy investor’s expectations for token growth and to avoid seller’s price seller’s price fluctuations that are driven by speculators. These two issues are contradicting each other.
Challenges ahead – There are no simple answers for how to achieve a win-win scenario here. Introduction of cryptocurrencies created a much more complicated problem than what we have with the 180 legal tenders today. Although the initial concept of using cryptocurrency that started with Bitcoin, might have looked simple, the fact that the number of new cryptocurrency mushroomed to over 1,500 presents a more complex problem that I don’t see anyone working to solve it.
In my next articles, I will explore potential scenarios for uses of cryptocurrency and blcokchain technologies together and separately. I see promising potentials for blockchain technology uses in B2C and B2B businesses. And I see significant challenges that cryptocurrency concept has to address before it could find practical uses in business. More on the in next articles.
About the author:
With over 4 decades of technology based business experience, I have seen many hype driven new technology launches. Some succeeded but most failed. Some will say that today things are different than before. Yes today things are different and that’s the exciting part. However, time doesn’t change everything. The fundamental principles for starting and building a business remain as valid today as it was decades ago. The rules that guided business decades ago still guide successful businesses today. There is no avoiding them.
For those who remember the 2000 dot-com era, you should see similar patterns evolving now. In 2000, I worked with number of startups around the world. One startup in particular that comes to mind, raised over $ 300 mil in VC money to build data centers across US. They were building data centers because everyone else was. Eventually, the main reason this startup failed was that they lacked a business vision on what problem they were solving, who their target customers were, how they woould reach them and how they would execute on the business plan. They focused on the technology hype that everyone was immersed in. Now almost two decades later, there are many successful could data center providers.
What this shows is that there was a need for data centers/cloud services in 2000. Most startups simply didn’t have a business model/plan. They focused on technology alone. In fact, the famous phrase invented during that period was “build it and they will come”. Today the introductions of blockchain and cryptocurrency technologies is following almost identical path.
I do see a need for more secure, more efficient and lower cost transaction systems with less limitations and restrictions. I also see a need for a simpler and more efficient means of processing buy & sell financial transactions globally. There is a need for borderless and frictionless solutions for both.
My mission is to help business leaders sift through the hype and the excitements of these two emerging technologies and to help them discover real business opportunities. Despite the elevated hype that comes with today’s blockchain and cryptocurrency technologies, there are also new opportunities to discover. Similar to the dot-com era, businesses need new solutions and we need to help new startups better align these technologies to the real businesses. In my next articles, I will share examples of opportunities, risks and benefits that blockchain and cryptocurrencies can deliver to businesses. For more information on this topic, visit our blog frequently for updates.