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.
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
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.
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?
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.