John Lee Quigley


The Industry Life Cycle Making a Strong Case for Bitcoin Maximalism

The easy money days of 2017 for cryptocurrency projects are over. The declining prices seen throughout 2018 have taken their toll on cryptocurrency projects. Declining cryptocurrency and token prices can result in funding pressures. Some recent examples of how this has manifested include:

This may be a shock to those who entered cryptocurrency as recently as 2017 and were promised perpetually increasing prices and adoption. What we are seeing, however, is highly characteristic of how markets operate and how industries develop.

The industry lifecycle is a generally accepted model regarding how industries develop. It is the reason why we end up with at most a handful of companies dominating each industry. Consider the United States (US) car manufacturing industry. According to Elon Musk when he appeared on the Joe Rogan podcast, the only US car manufacturers which have not gone bankrupt are Ford and Tesla. We see the same phenomenon take place in other developed industries and the phenomenon makes a strong case for bitcoin maximalism.

Before we delve into the stages of the life cycle, let’s consider what exactly is an industry. Industries essentially arise from innovation and disrupt and displace previous ways of doing things. Before the car industry developed, there was a lot more economic activity surrounding horses. Prior to the propagation of television, the radio business was far larger than it is today. On a long enough time scale, the survival rate for everything goes to zero. Even the industries we think today will be solidly ingrained in civilization perpetually will be eventually displaced by innovation. Many industries which are disrupting and displacing today are being developed in the digital world as opposed to the physical world. Things such as augmented reality, the sharing economy, and cryptocurrencies have all been born as a result of the internet. The industry life cycle breaks down into five stages:

Introduction — At the first phase, the innovation/disruption is unknown to the wider public and highly questionable whether it is even feasible. This involves a small number of pioneers tinkering and working on projects in the area. This stage would be the equivalent of Satoshi Nakamoto, Hal Finney, and other early bitcoin engineers working on the network while bitcoin remained mostly unknown to the wider world. Projects developed in this phase have a high chance of failure. For example, the banking on bitcoin documentary details early-stage startups oriented around bitcoin failing such as BitInstant founded by Charlie Shrem.

Growth– This stage is characterized by increased public awareness. A lot of new businesses start early in the growth stage trying out new business models in the industry. The amount of businesses starting accelerates as the growth stage progresses and investment money also begins to flood the market. This stage is highly characteristic of 2017 with countless projects starting. This stage was actually amplified in cryptocurrencies as a result of initial coin offerings as an alternative way to raise funds. Countless projects were started as investors believed prices would continue to increase in perpetuity. Projects completing ICO’s raised over $20 billion in 2018.

Shakeout- The shakeout phase is characterized by intensified competition. During the growth phase, a lot of new money from investors arrives into the industry making it easy for entrepreneurs to funds projects. However, there is a limit to this and as new money arriving in the market dries up, projects have to actually start producing a result. Markets naturally operate in a nonlinear way with a small number of entities capturing the majority of market share. The book Antifragile covers nonlinearity in great detail. A more basic explanation is the well-known 80/20 rule whereby 80% of something is typically accounted for by 20% of the group. For example, 80% of the wealth would be accounted for by 20% of the population. Or in this specific case, 80% of the market share would be captured by 20% of the projects. The shakeout phase involves projects aggressively cutting costs and prices to compete with close competitors. It seems highly characteristic of what we are seeing now with many projects struggling to survive.

Maturity- The maturity phase brings the nonlinear nature of markets to its natural point whereby at most a handful of entities dominate the entire market. We can see it in many technology sectors today. Facebook, Twitter, Snapchat, and Reddit dominate social media. Apple and Microsoft dominate the personal computer industry. Amazon became the dominant e-commerce company and aggressively leveraged their economies of scale to compete in other areas such as cloud computing. What is the natural maturity phase for the cryptocurrency market? It is likely to be that bitcoin captures the role of all cryptocurrencies. Bitcoin operates on the largest blockchain with the biggest computing power securing it. If any genuine innovations are made in the development communities of smaller altcoins, the bitcoin development community can integrate the innovations into the bitcoin protocol making it difficult for altcoins to compete. There is another viewpoint that there may be one cryptocurrency to serve every major use case. This could be something similar to bitcoin serving as a network which enables the user to be self-sovereign, another network facilitating cheap peer-to-peer payments, and a cryptocurrency such as Monero serving all of a users privacy needs. However, with developments on top of the bitcoin protocol such as the Lightning Network facilitating fast payments, there is the counter-argument that anything which gives another cryptocurrency a competitive advantage can be developed into the bitcoin protocol including privacy features. There will be hundreds of thousands of altcoins and tokens as there already is. Whether they will be worth anything is an entirely other matter.

Decline- The decline phase takes place when a new industry arrives to disrupt or displace the old. Horses being displaced by cars. Postal services being displaced by emails. Netflix disrupting the cinema industry. AirBNB disrupting the hotel industry. The list goes on. At this stage, it is essentially futile to envision what may displace or disrupt cryptocurrencies as they are still at the beginning stages of disrupting fiat currencies and centralized methods of business. Once again, on a long enough time scale, the survival rate for everything drops to zero. Quantum computers are one innovation I constantly hear about that could pose a potential threat to cryptocurrencies but I am not near educated enough about quantum computing to understand the intricacies of the threat they pose.

The great allure to new entrants of the cryptocurrency markets is to find the next bitcoin. Modern society is characterized by an extremely high time preference. We want instant hits of gratification. Whether it be scrolling through Instagram for a dopamine hit or taking a punt on an altcoin that is claiming competitive advantages. However, it may change your perspective if you start considering cryptocurrencies with a lower time preference. In terms of the industry lifecycle, it is highly unlikely that many of the altcoins and tokens being launched will not be worth anything. If you think 10–20 years down the line as opposed to 1–2 years, there is a strong possibility there will only be one.

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