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A few days ago I had a discussion with someone online about crypto projects. In the discussion I sarcastically made a statement about my annoyance with the constant bombardment of speculative announcements about upcoming partnerships and how people disseminate nonsense rumors from unverified sources to create hype around a coin.
In my comment I stated that people should be careful listening to unverified rumors and hype about projects because most announcements turn out to be nothing more than a means of creating a pump and dump scenario. I personally believe that the behavior of spreading nonsense ultimately hurts crypto because it makes it difficult to find valuable information about a project and makes investing in it akin to gambling (and gambling is not a great wealth building strategy).
Note: This article goes on a bit of a rant in the beginning and I’m a bit of a pretentious asshole when I rant so bear with me. The article does have a point.
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After I made my sarcastic point in the discussion an individual in the group chimed in and tried to bait me into an argument over my sematic use of words. Apparently he was quite offended by the fact that in my generalized statement I used the term “company” in place of “project” and the word “share” instead of “coin.” He apparently couldn’t see the parallels between the stock market and crypto markets and I didn’t bother explaining to him that ICO’s and IPO’s serve the same function and other than terminology and minor nuances, shares and tokens are essentially the same thing.
It became apparent to me that he wasn’t there to discuss. I had presumably threatened a project that he was invested in and he would try to discredit my idea in any way he could. Even after explaining my point further he decided to skip over the point I was making and instead decided to focus on my choice of words.
“They’re not company’s and they don’t have shares!”
He wasn’t wrong in his statement but it really made me wonder if he truly understood the implications of what he was saying. Did he understand that the fact that crypto projects are not companies is one of the possible reasons that many of them will ultimately fail? Did he understand what that meant for a projects longevity and ultimately his invested money?
Companies vs. Projects
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Companies as we know them operate under a pretty simple formula. They offer goods and/or services to customers in exchange for money, and then they use the money that they receive to keep their operation going and to build infrastructure. Ultimately, they use the money that they earn from selling their product to pay their employees and the costs associated with operating a business, to maintain or develop their inventory/product and to expand their operation.
Crypto projects appear to be a bit different in this regard in that they do not really sell a product to customers. As such, they do not generate revenue. Instead they raise funds for their project by holding an initial coin offering (ICO), which for all intents and purposes is the same thing as a company raising funds through an IPO. However, instead of issuing shares of the company to investors the project issues tokens which supposedly solves some sort of real world problem and which can be traded on the open market. The project then uses the funds that they received during the ICO to pay their employees and develop their technology.
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A portion of the tokens are also given to the projects developers in order to motivate them to build the projects technology. These tokens are typically released to them gradually so that they do not up and leave the project before its completion.
The theory of this methodology seems to be as follows: if the project does well then there will a large public demand for the token. Large demand will drive the tokens price upward and the developers who hold tokens, will ultimately make a lot of money. Of course in an unregulated market the public is hoping that the developers won’t just run away with their money after the ICO or after their portion of the tokens are released from the projects contract.
But What About Long Term?
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So with these projects collecting all their money up front and having no plan to generate revenue in the future, how do they plan to sustain themselves long term after the money from the ICO is used up during operation?
For instance, let’s imagine that a project underestimates their start-up cost for developing their tech or that they don’t receive as much from the public as they were expecting to. Since these projects do not have a product for sale and have no ability to generate revenue, how can they maintain their operations over the long term (i.e pay their employees, marketing, infrastructure and so forth)?
Typically investors who are trying to build wealth don't really care about a tokens day to day fluctuations in price. Typically they think about sustainability of a project and whether or not it will still be around in 2, 5, and 10 years down the road. Investors generally want their nest egg to grow over the long term and they certainly do not want to lose it. As such, sustainability of a project is crucial.
I’m sure that a lot of projects have considered the problem of sustainability and how they will make money in the future, but I do think that it is a bit unclear for a lot of us how they plan to do this. Perhaps they will collect a small fee every time a transaction is made with their token? I don’t really know. But I do believe that with all of the competing projects out there, a lot of them will ultimately fail because of what I am discussing.
What are your thoughts on the subject? How will projects sustain themselves in the future after the developers tokens have been released to them and the projects ICO money is used up?
Ultimately project management and the ability to inform the investors accurately of the roadmap the project will follow and transparency. Two projects come to mind for me CarVertical and Seele.
CarVertical made an announcement that they had secured a deal with BMW only for BMW to refute the scale of this arrangement.
Seele had an unfortunate start with funds being stolen followed by flawed ICO that was then successfully launched a second time.
Shareholders of companies get the opportunity to vote on important matters but Crypto based projects will votes on their performance, lack of progress on a potentially daily basis.
The balance between good PR, transparency and vision is a lot to juggle at the same time but they need to get a grip early. Thanks for posting this.
Thanks for the comment. You made some really good points.
So do you have any thoughts on how these projects will sustain themselves long term? Since they do not generate revenue - how will they be able to maintain their operations? Or are you aware of projects that have a plan in place to generate revenue? Or maybe they do not need to generate revenue because of some factor that I am missing. Any thoughts on any of these points? I would love to hear other opinions on this.
Looking at some of these projects they read like a good thesis but unless they can market them correctly and maintain good optics even when they have a long-term viable proposition, they could come unstuck through lack of interest because they did not keep people informed along the way.
I agree with what you're saying - that marketing is important for keeping people informed.
I'm still unsure how these projects plan to sustain themselves over the long term though, when they do not generate revenue. Operations cost money, employees cost, and innovation/development costs money - so if projects do not have a plan to make money how will they sustain themselves? I guess Its a question that will be left open for the time being.
Thanks for adding to the conversation :)
What you discussed here is why a lot of folks think cryptos are scam. Like a group of business guys and techies can just come together, write a whitepaper and pitch their project as a solution to a "real world problem", clone a coin and create buzz for an ICO, take people (investors') money with zero guaranty of roi (no government regulation).
A lot of coins/projects have come and disappeared, people technically forget their money, a lot of people accept crypto investment as speculative, a gamble they can lose and move to the next hopefully viable one.
I think we need to start considering these projects as "companies" and considering their long term sustainability, the utility of the project and most importantly, it's ability to be self sustaining (by generating revenue), otherwise new scammers will always come, rake money in with their ICO, run their project for a while, and disappear.
With all that said, we should also consider that what you just discussed is the "ideal state" which we expect cryptocurrencies to grow into, but looking at the trend, a lot of people dont care, there are a lot of coins like dogecoin that simply exist as "coins", no project backing at all and they still exist and technically have value, this is why traditional investors are wary of cryptos as an investment.
I don't think that this is something that can just be done. The issue is that these projects do not operate as companies. They do not sell products or generate revenue. However, the Dogecoin is a good example, maybe they will just sustain themselves in the open market. The issue arises if updates and changes need to be made in which people do not want to spend their time at something if they aren't getting paid for it.
i think dogecoin and the likes are running on sentiments of their support community, these guys keeps developing and updating but I dont know how long they will keep that up? I guess most of them will die off in the long run but those with working services will eventually be the only ones left.
I am currently writing a contest entry for such platform, it has been in existence for 2 years with about 500k users, they need the ICO money to scale and also make information provided by their travel site more trustworthy. Such coins are not subjected to investors emotions or market fluctuation (in my opinion) but on the growth of the business behind it. They are less likely to disappear.
Steemit, to me is also a good example although they would find a way to monetize the site (i mean get money from third parties, not us).
I agree that most companies will die over the long run. Regarding Steemit - it will be interesting to see how it evolves over time. It could end up being like facebook - starts out as a free service with no advertising, but then eventually they added adverts to the site to generate revenue. I believe steemit is working on smart media tokens (though I haven't followed that progression). If this ends up being the case,it will change things and possibly add to its sustainability.
it will be great to see how all that plays out. I do not know about the smart media token but if they end up putting ads, they will pay holders dividends (hopefully).
Yeah i guess we will see. It is interesting