A significant number of crypto coins have been released in the last few years, often to great fanfare and celebration, only to fade and fail as the public and investors shun them. According to Coinopsy, which tracks such failures, there are around 1,085 dead coins at the time of writing. That’s a massive number, even next to the approximately 3,000 still in existence, and senior industry figures expect many of those to fail, too.
Why do so many of these projects unravel? You expect many initiatives to come and go in a fledgling market, of course – the 1990s dot-com bubble is the perfect example. But at the same time, cryptocurrency developers have traditionally spent too little time developing the business-use case for their coins and tokens, then only realizing after the launch that their idea is yesterday’s news.
Time and again, we see launches that copy a previously successful coin – “coin x is the new Bitcoin”, for example. Still, the market already has Bitcoin, and it continues to be in demand – as evidenced by the 18 millionth Bitcoin being mined only last month. We tend to ignore this problem with developers, even while we rightly criticize regulators for not being able to keep up with the fast evolution of the crypto market – despite efforts such as Howey Coin by US regulator the SEC, which was a fake new coin designed to teach investors about the risks of putting money into crypto.
No doubt these kinds of developer errors will continue. Here are various other themes that we think will have a bearing on future crypto failures:
1. Big Finance has arrived
Eleven years ago, the pseudonymous Satoshi Nakamoto silently revolutionized money with the launch of his (or her’s) now-famous white paper that outlined Bitcoin. In the initial years after this vision took off, many of those who released altcoins and tokens were small teams of developers and left field entrepreneurs. They had a clear mission to bring the world of traditional finance and central banks to its knees with decentralized units of exchange that were beyond anyone’s control.
A few years on, these bank killers have greatly been assimilated by the big financial institutions they once sought to challenge. Wall Street is steadily taking charge of the crypto action, professionalizing trading with the likes of derivatives and futures products.
You may now be entering a phase where only big institutions will possess the ability to produce a profit from cryptocurrency design. It seems highly likely that the next revolutionary white paper will be produced by a global multi-billion-dollar firm – an ironic full turn of events, to say the least.
Many other cryptocurrencies from more humble beginnings will fail in the future since they don’t have the resources to compete with these gigantic institutions. They will be driven by sunk costs and the crypto dream to dominate the future of money, but in many cases, it won’t be enough.
2. The future is stable
In order for a cryptocurrency to be successful, two things need to happen: there has to be a reason why people want to use it, and they have to trust it. People will easily trust a coin or token thanks to the underpinning blockchain technology, the decentralized cryptographic ledger systems on which this industry is built.
This means that the basis upon which the market judges if a new release will stand or fall is mainly its use case. There are now altcoins in existence providing everything from new ways to fund web advertising to units of exchange in the gaming world. But more generally, in a world in which is no longer enough to simply claim to have released a better Bitcoin, the market’s attention has pivoted towards stablecoins.
Stablecoins are cryptocurrencies that are specifically developed to avoid the wild volatility of cousins like Bitcoin by being pegged or backed by assets like traditional currencies or precious metals. They are developed to encourage people to use cryptocurrency for everyday buying and selling, while also providing a stable store of value for traders on the many crypto exchanges that don’t deal in traditional currencies.
Examples include USD Coin and Tether, both of which are equivalent to US$1. The fact that it takes considerable financial resources and infrastructure to make such coins operational is again likely to favour big institutions – witness Facebook’s attempt to launch the Libra stablecoin, for instance.
3. Losses more foul than fair
A lot of investors have lost money through scams in the crypto world. One recent notorious example is the alleged OneCoin ponzi scam, in which investors were promised guaranteed 300% returns for investing Bitcoin or US dollars with a Nevada-based outfit.
The money was supposed to be plowed into foreign exchange options and altcoins but was allegedly instead used to pay off other investors in the scheme. Fortune magazine recently speculated that OneCoin may have generated losses in excess of the US$19.4 billion (£15 billion) racked up by Bernie Maddoff’s Ponzi victims in 2008.
Somewhat different was Bitconnect, an exchange in which investors could swap Bitcoin for Bitconnect coins, which would be lent out with claimed returns of up to 120% per year. After longstanding Ponzi accusations, the US authorities stepped in last year and the exchange abruptly closed. Bitconnect coins plunged 96% in value, creating massive losses, though they still exist and trade today.
An alternative problem is hackers raiding exchanges. The most infamous example is the Mt Gox attack of 2014, in which over 850,000 bitcoins were stolen and never recovered. More recently the Binance exchange, one of the world’s largest, has been hacked several times, costing investors tens of millions of dollars. One other alarming case was that of Gerald Cotten, the 30-year-old founder of Canadian cryptocurrency exchange Quadriga, who died a year ago. Because nobody had access to his passwords, the investments of 115,000 customers worth US$137m were unrecoverable. When a court-appointed auditor was eventually able to access his account, it turned out the assets had all been sold months before Cotten died.