2013. I’m sitting in Palo Alto, California across from one of the smartest, most successful investors of all time.
Now, keep in mind that 2013, was a very weird year for Bitcoin, because there was a crazy rally followed by a not so nice low period. So, as we’re watching the prices slide up, I’m sitting across from Sam Altman, one of the most successful investors ever. He started a company which he sold for a lot of money. And then he went on to become the president of Y Combinator and to do a bunch of other things. He started OpenAI with Elon Musk. He’s got a new moonshot project. The guy is super smart, he’s super successful and he’s very thoughtful.
He looked at me with this very unusual look, almost like a predator looking at prey. And he said, “what do you think the price of Bitcoin will be this year?”
I said I have no idea. He said why don’t you guess? So, I just guessed. I said, well about an a, 10,000 bucks. Why not just throw out a random guess? And he said, why do you think it will be $10,000? And I said, honestly, I have no idea. I just guessed. It’s just a guess. And he had this unusual look in his eye and I asked him, okay, what about you, Sam? What do you think? And he said, I think that we’re still early in the hype cycle and it wouldn’t surprise me if we saw a correction soon.
He wasn’t wrong. The price of Bitcoin did indeed correct, dramatically, severely, and shortly after we had that conversation. Ever since then, I’ve always asked myself, how could he have known? Was it a lucky guess?
Was there something he was paying attention to? I’ve heard Sam talk about hype cycles a few times since then. And as somebody who likes to know things, as somebody who wants to try to figure out how things work. So, I can have a sense of what the future is going to be. I started to become obsessed with this idea of hype cycles in technology.
So how can we take this learning of hype cycles, apply them to crypto and then try to guess where we are today?
Well, let me give you the summary right up front. I think that we are approaching the valley of despair, or the trough of sorrow, or the valley of disillusionment, whatever you want to call it.
Let’s talk about the hype cycle
So, there’s this guy named Gardner and he came up with these five stages:
- There’s an innovation. So, some new breakthrough.
- The peak of expectations. This is like maximum pipe.
- The slope of despair, where it’s coming down and down and down and down until you hit the really trough of disillusionment. That’s like the bottom section where things are as bad as they can be. I don’t think we’re here yet in crypto, by the way. And I’ll explain why in just a second.
- The learning phase .
- Peak of productivity where productivity is just like coming along now.
It’s important to understand that this graph right, kind of like goes way up, comes down to an absolute bottom and then starts to slowly come back up. And the axis of this graph, our expectations and time, and the basic idea is that the expectations of what this thing can do, go way, way out of reality. They come away down below reality and then they like start to slowly find equilibrium with reality.
Why do I think that we’re not yet in that trough of disillusionment? Here’s the reality. In 2017, there was an enormous explosion of money that moved into these initial coin offerings. The vast majority of them, 99.999% straight up scams, whether the founders knew it or not. There were these marketing companies that propped up that basically were looking for any sucker who wanted to found an ICO, they’d say, hey, let’s slap your name on this coin. And we’ll take care of the rest.
What they didn’t realize is they were just signing up for liability. And these marketing companies were splitting the profits from these ICO, with them. You could have these hapless founders who just would raise millions, tens of millions, hundreds of millions without really having any clue or intention of shipping anything. They might’ve thought they’d figure it out if they raised enough money, but the vast majority have not figured out anything.
The bottom of disillusionment
So, here’s the deal. You take the vast majority of these projects, you set them aside, what’s leftover. Well, there’s a very small handful of legitimate experiments, legitimate founders with legitimate ideas who are actually trying to make a thing. Here’s why I don’t think we’re at the bottom of disillusionment yet. The reason is even though most people understand that the vast majority of these coins were scams, what people don’t yet realize is that of the very few that are not scams, we haven’t actually had a chance to see a lot of these networks launch yet or see how they do yet.
So you have some super hyped projects that are just now starting to launch in, you know, kind of new areas. You had a bunch of old projects competing with the likes of Ethereum. So things like EOS and Tron, which are basically ghost towns. And we all kind of knew that they probably weren’t going to work because of their cartel model.
But now you have these new things like Polkadot, super hyped, but is there a market for it? Is anybody going to use it? What about Filecoin?
You know, I was an early investor in the file coin (full disclosure). I’m a big fan of file coin as part of the presale. Even though I’m a huge fan, is there a market? We don’t really know. And even if there is a market, is it going to take off?
Or there could be a market, it could be the best thing. And it could just take 10 plus years for it to get any kind of material traction. You’ve got these other things that are kind of like a censorship resistant, but like a legitimate experiment. That’s also trying to compete with Ethereum like Definity, is there even a market for Definity? We really don’t know.
We are about to watch these super hyped projects run by a super smart people with super smart teams and see if they actually work. Now, here’s the thing I like to consider myself a rational optimist, but we got to have real talk. You know, the chances of these projects working is extremely small. So first of all, tech is hard. It’s hard to make a thing where you’re finding people who have a hair on fire problem and giving them a better solution than anything else that’s out there.
That’s just really hard to do. And it’s hard to do for a market that’s meaningful enough that the value you capture can be shared amongst a big group of people and be meaningful. It’s just really hard to do that.
The thing about cryptocurrencies is that it’s the normal amount of hardness times 10. And the reason is distributed systems unstoppable, censorship resistant systems are incredibly difficult. It’s just difficult to make them work at all. And then if you’re creating some new thing like Definity is doing, like Filecoin is doing like Polka is trying to do.
It’s just like really, really hard to both make a legitimate breakthrough and find product market fit, and have it capture a meaningful enough amount of money that it becomes worth anything. Now, do I want these projects to succeed? I would love for all of these projects to succeed, but the reality is just without even examining them, just understand that the chances of any of them working is extremely small.
Does return worth a risk?
Now, you know, there is the simplified argument that, you know, if they win at their thing, the prize could be extremely big, but there’s two really, really, really under-appreciated things that you really need to take into consideration. Have I said really enough really, you think so, have I really? Anyway, the point is as much as I would like the real experiments of crypto to work, the chances of them working are small, very small. And I think that as we see these super hyped projects that haven’t launched yet, not find product market fit, and the super hype projects that already have launched as we continue to watch them turn into ghost towns, as they go further and further down the road of becoming ghost towns. At some point, the market should have sanity and accurately priced them. You know, there are some things that like just truly, they really should not have any fundamental value because they just don’t provide any value outside of speculation.
So, like ripple, for example, no offense to any buddy who’s well, you know, diligently working hard on ripple, you know, and I’m sure there, well, sorry, real talk ripple is just the worst thing ever in my opinion, not financial advice. It’s just like, there’s no purpose in having it. It’s not better than a spreadsheet. It’s just like a, it’s like a useless thing. There’s no reason for it to exist. And eventually in theory, the reality, the sanity should enter the market and it should be valued appropriately. Will it ever go to zero? I don’t think so. There will probably always be some people who just, you know, hold it for whatever reason there might be pumpers and dumpers who buy it and sell it to manipulate the markets. But there’s really no reason for this to exist. And there’s really no reason for most of the cryptos that have ever come out to exist.
You know, I love the legitimate experiments in censorship resistant technologies because they would have helped my grandparents and their friends during the Holocaust. I mean the outcome of the Holocaust had been so different from my family. If censorship resistant technology existed then, and the same is true for a lot of people who live, who are living right now, you know, as different currencies and Latin America are melting, having the ability to leave a local currency through an escape hatch currency, like Bitcoin, and then go to a new country. That’s pretty awesome and that’s new. Now, how many of these emerging experiments actually have a market where they can even find product market fit? Well, we’re going to find out and you know, if you’re looking at adoption of the cryptos that have come out, there’s just so little adoption. And I mean, I think for the most part, we all knew that the chances were low, but I think what’s happening now is that generally more and more people who have been on this ride for a while, who bought into these stories of moon, right?
It’s going to take over the world while that might have been exciting to participate in that mania and seeing the price rise and rise and rise. I think we can all agree that the peak of expectations is behind us. And we’re somewhere on our way down to that trough of disillusionment. And in my opinion, we’re not there yet. And the time at which we will arrive, there is probably the next couple of years as we watch the very few legitimate experiments in crypto struggle, legitimately struggle to find real adoption.
