Crypto, DeFi

and New Dot-
com Bubble

Cryptocurrency lender Celsius Network filed for bankruptcy and became another victim of the collapse on the crypto market.

It was founded most recently in 2018. In August 2020 it raised a $20 mln crowdfunding round with valuation at around $150 mln. A year later, the company raised a $750 mln mega round and was valued at $3.5 bln. CEO Alex Mashinsky expected that in 2022 the value will be about $10 bln, attributed his bullish estimate to the firm’s ability to provide lending services in almost every sector of crypto. Now the platform has negative net assets, In Q2 its assets dropped by 80% to $4.3 bln vs $5.5 bln of liabilities.

All this is very reminiscent of the dot-com boom, in a year and a half NASDAQ index tripled to 5100. Such high prices were justified by numerous commentators and economists who claimed that a «new economy» had arrived. In fact, these new business models proved to be ineffective, and the funds had been spent mainly on advertising. Large loans led to a wave of bankruptcies, a strong drop in NASDAQ index, as well as a collapse in prices for server computers. Doing business via the Internet was only a tool for old business processes, but not an independent and new business process capable of generating income from invested capital.

Now we see a similar situation, crypto is the new economy which pretends to destroy the old order and foundations.

Company value is in the tokens / protocols that were created for some use cases. Over the covid period, the capitalization of crypto has skyrocketed from $350 bln to $3 tln. But what useful use cases and new processes have been created? — almost none. Token prices went up mostly due to hype in the last 2 years. Almost no sectors with fundamental value were created. Perhaps the largest sector in the crypto world is games and bitcoin — a standalone game of unregulated non-iflatory digital property. It is not enough for a full-fledged economy. When the hype faded, the market collapsed and DeFI which provides financial services to crypto collapsed too.

What’s next?

If you look at the dot-com collapse, it was accompanied by the ruin of thousands of firms and companies, mostly newly formed ones, massive lawsuits, new regulation, layoffs of programmers and the saturation of the labor market. However, about half of the companies survived, the industry continued to develop, Amazon and Google are tech giants now. Fundamentally new online processes (not old offline processes that were simply transferred to the Internet) began to appear en masse only in the early 2010s, thanks in part to smartphones. Nasdaq restored to its 2000 level in 2015.

I believe crypto is fundamentally to stay. Eventually the metaverses will appear, we all will be connected to the matrix, and a new economy will be built. Since everything is happening faster now, I hope that this will be already in the 2020s.

Now the GDP of the world economy is about $100 tln. The capitalization of all crypto is about $1 tln, no one knows how much real value this market creates, but it is obvious that it is ten times less. Until this economy grows, starts to create value and generate money, investors will not find reliable projects here, only Las Vegas.

For DeFI — financial middlemen in the crypto world — the same situation. In the real world, a firm takes a loan, invests it in some production where ROA is higher than the interest rate and then pays it off. It creates value for all participants — the firm, the bank and investor. And until the crypto economy creates fundamental value, DeFi will fund the air and Potemkin villages, which will lead to new ponzi schemes and bankruptcies.

As I said before, I believe crypto will move from «Peak of inflated expectations» to «Plateau of productivity» point on Gartner Hype Cycle in 5–10 years. According to Benedict Evans, the tech industry has a new center about every 15 years. Now the era of the smartphone is just coming to an end. Whatever will become the new core — VR devices, neural implants, something else, it will definitely push this next technological revolution.

Special thanks to Sergei Khairullin for collaboration on writing this article.