Party Like It’s 1999: The Beautiful Inevitability of a Bubble in Blockchain Startups

One could forgive me for assuming that the North American Bitcoin Conference, a gargantuan 4,000-person event held on January 18 and 19 in Miami, would be about Bitcoin. There were a couple of terrific speakers on the topic, most notably our own Jeffrey Tucker, but the event was dominated by pitches and presentations from startups in the wider blockchain ecosystem. There was plenty to learn about untapped markets and new applications for blockchain, but for this economist, the event provided something much more valuable—an indelible snapshot of an inevitable moment in the history of a transformative technology, and a new understanding of what a technology “bubble” actually means.

The expo hall, where perhaps 200 startups had set up booths complete with glossy branding and conference swag, crackled with the manic energy of a gameshow money booth. The place felt like it was at maximum capacity, both in terms of people and ideas. The competition for attention and ultimately investor money, mostly in the form of initial coin offerings (ICOs) was fierce. And who could blame them? ICO funding went from just shy of $100 million (46 ICOs) in 2016 to a staggering $3.7 billion (235 ICOs) just through October of 2017.

Comparisons to the dotcom boom are almost too easy to make, but if someone in the room had been playing a Ricky Martin CD, it could easily have been mistaken for 1999 rather than 2018. In broad terms, there were two types of startups pitching their wares. The first uses blockchain technology, and generally tokens traded on the Ethereum blockchain, to disrupt the market for a given product or service. Renewable energy, emergency response, real estate, unmanned cargo drones, dating, and too many others to count were on display. The second type provide services to the wider blockchain/cryptocurrency ecosystem: trading platforms, consultants, and makes of physical currency wallets are examples.

Is there a bubble in the ICO/blockchain startup space (distinct from the price of Bitcoin or any other cryptocurrency)? Short answer: yes. Long answer: still yes, but it involves very little of the irrationality most people associate with such things, and shows just how important the underlying blockchain technology truly is.

The common media narrative of a bubble is one of bad ideas we once thought were good. How could so many people have been so naïve? There may be more truth to that for some bubbles than others, but what I saw in that expo hall was something far different, that changed my understanding of the process by which we wrap our minds around technologies that can change the world.

Blockchain is a foundational technology. Even if it doesn’t prove as important as the internet, it’s something novel over which new applications are built. And when a new foundational technology is introduced, it is followed by a deluge of new ideas—uses for the new technology like the ones I listed above. I had never questioned the assumption that many of these ideas are bad and had to be weeded out—that this was the driving force behind the bursting of a tech bubble. But the majority of ideas I saw in the expo hall were quite good. The conference didn’t feature too few good ideas for the use of blockchain, it featured too many.

This explosion of new good ideas forces entrepreneurs to race for investor funding and to bring the concepts to market. This race is perfectly rational on the part of the entrepreneurs—they want to strike while the iron is hot in terms of publicity of the overall concept. They also often have to race others with the same idea—the expo hall had three startups offering some form of blockchain-based trading of art alone. It can also be rational for investors, if they spread their money across many companies with the understanding that there will be many failures but perhaps a few massive successes.

With good ideas all amply funded, why does a bubble burst at all? I suspect that it’s because everything happens too quickly. First, in the race to bring new concepts to market, startups haven’t had the time to beta-test, let ideas incubate, or develop the operational capacity to function as a medium or large company. This happened frequently in the dotcom crash, when heavily funded startups spooked investors by being unable to quickly turn a profit.

Second, the entrepreneurial race outpaces the public’s ability or willingness to understand the new technology. My guess is if one looked back at the dotcom stocks that went bust, most of them would involve applications that are successfully being provided by companies today. People just weren’t as ready to use the internet in 2000 as they are today. This issue is especially challenging for blockchain-based startups, where people often find the technology counter-intuitive. Explaining the most basic applications like Bitcoin is still often an uphill climb; I have trouble fully understanding some of the more complex applications I saw this week. This doesn’t mean our intuition won’t evolve along with blockchain, but the process may take a lot longer than it takes for the money a startup has raised in an ICO to run dry.

The last 48 hours have been among the most fun I have ever had as an economist—a significant shift in the way I think about a topic I study. I want to go back to older foundational technologies, like railroads and electricity, and see if I can find a similar pattern. In the meantime, suffice it to say that I’m more bullish on blockchain technology than I’ve ever been, but see a bumpier ride in the short term than I could have imagined.

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Max Gulker, PhD

Max Gulker joined AIER in 2015. His primary research areas are applied microeconomics and industrial organization. Max previously worked as an economist for Keystone Strategy, supporting expert testimony for antitrust and intellectual property litigation in high tech industries. Prior to that, he worked on financial litigation matters with NERA Economic Consulting. Max holds a PhD in economics from Stanford University and a BA in economics from the University of Michigan. Follow @maxgAIER.