Reports 350 items
Recommended Report: It's 1994 In Cryptocurrency (forbes.com)
Ari Paul , CONTRIBUTOR

CIO of BlockTower Capital  Opinions expressed by Forbes Contributors are their own.

The total market value of cryptocurrency has increased from $18 billion at the start of the year to over $300 billion today. Sometimes it seems like everyone is talking about Bitcoin, yet less than 1% of the world owns any. Cryptocurrency today is similar to the tech boom in 1994.


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CustomTable

Bitcoin and EmailEmail, as we think of it today, was invented in 1972 by Arpanet engineer Ray Tomlinson.  Email was the first, and for a long time, the only, “killer application” of the internet.  Bitcoin was launched in January 2009; it was both the first cryptocurrency and the first blockchain. 


Bitcoin, as trustless and censorship-resistant money, was the only blockchain “killer app” for many years.For 15 years, email was mostly a toy for engineering hobbyists and a small number of scientific researchers.  It wasn’t until the late 1980s that email began to enjoy meaningful commercial use, and not until the mid 1990s for widespread retail use. 


To make the jump from hobbyists to commercial and then average retail users required three factors.  First, the technology itself had to be developed to a point that it was standardized, stable, and had features valuable to users.  Second, user interfaces had to be developed to make email approachable to non-engineers. 



And third, the user base had to grow over time; the more people that use email the more valuable it is to each user, and this virtuous cycle of adoption takes time to play out. Similarly, Bitcoin was mostly a curiosity for engineering hobbyists from 2009 to 2016. 


In 2013 we saw the first hint of broader adoption as companies like Coinbase made Bitcoin more accessible to non-technical users, but in 2013 Bitcoin still faced technological problems (like an unintentional hard fork), few user-friendly interfaces, and a minimal network effects. 


By 2017, Bitcoin had a proven stable protocol, a plethora of user friendly interfaces (including ATMs in most big cities and Exchange Traded Notes (ETNs) that allowed Bitcoin investment via an IRA or 401k), and a user base that had reached critical mass such that Bitcoin could be purchased, traded, and spent throughout most of the world. 



Precise estimates of adoption are impossible, but we can produce a rough guesstimate.  Combining data from Coinbase with work by researchers Garrick Hileman and Michel Rauchs (2 - Crypto Adoption Study) we estimate that the total number of bitcoin users and holders is around 45 million people today, representing about 1/2 of 1% of the global population. 



This places us at the very early days of non-technical adoption.Like email in 1994, Bitcoin provides value today.  It can consistently and securely transmit monetary value across the planet and also provides a censorship and judgement-resistant store of value.  Like email in 1994, Bitcoin is a robust technology ready for widespread use, but very early in its adoption curve.

 And like email in 1994, the small network of users means that there are few people to whom you can send Bitcoin, and this leads many to question its usefulness.  What about other cryptocurrencies and other use cases?


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Original Chart. Data Source: http://www.virginia.edu/virginia/archive/webstats.html

Internet Access Over Time

Cryptocurrencies and WebsitesThe first public website went live in 1991.  The first commercial web browser went live in 1993 and provided access to the 130 websites that existed at the time.  By 1994, the count ballooned to 2,738 websites. 


These websites included corporate homepages, news, personal blogs, pornography, content aggregators, an online encyclopedia and the first online retailers.  Early websites were mostly electronic versions of “real world” things like newspapers, and many of these use cases persist today.  What’s notable is what was missing in 1994. 


LinkedIn, Reddit, and Facebook had no 1994 analogue.  And while we can draw a straight line between Encyclopedia Britannica and Wikipedia, or between MTV.com and Youtube, the introduction of community sourced content places the latter in a truly new category.



As with the internet in 1994, many use cases for cryptocurrency have already been presented in nascent form, but are “too early” (1- Web Timeline).  The online retailers of 1994 mostly failed because they launched before there was sufficient user adoption and infrastructure to support their success. 


In 1994 there were too few internet users, too little trust in online credit card processing, and too little underlying infrastructure for online merchants to thrive.  Another example of the problem of being “too early”: you can’t launch a high speed video streaming service if your potential customers are on dial-up modems.



Many cryptocurrency projects are struggling for similar reasons.  There are too few users prepared to utilize cryptocurrency, there’s too little trust in cryptocurrency and blockchains from a security perspective, and there’s a lack of underlying infrastructure


Additionally, as with 1994, some of the eventual world changing use cases probably haven’t yet been thought up.
Cryptocurrency has been gradually maturing since its birth in 2009.  The technology has grown more stable and trustworthy, the user interfaces (GUIs, ATMs, hardware wallets for easier secure storage, etc) make the tech accessible to non-engineers, and the network effects continue to grow along with the user base and market liquidity. 


But…global adoption remains trivial at less than 1%.  The entire combined market value of all cryptocurrency is less than half of Facebook’s equity and 1/25th the market value of gold.
Where does that leave us as investors?  Investing in the internet in 1994 wasn’t easy.  Many of the first movers in online commerce went bust. 


Many of the more ambitious projects were “too early” such that the eventual winners of those niches hadn’t yet been born; you may have wanted to invest in social media, but Facebook wouldn’t be born for another decade.  These same problems exist for the cryptocurrency investor in 2017.


As investors, we want to focus on three categories: 1. mature technologies achieving rapid adoption and network growth, 2. next generation technology for which the necessary infrastructure is in place or soon will be, and 3. “pick-and-shovel” producers that provide the infrastructure on which future uses depend.


With all of the calls of "bubble", it's worth remembering that we're in the early stages of global adoption as well as the early stages of development of the technology.  Capital is flooding in to cryptocurrency and like all floods of capital, some will find unproductive uses like the weaker ICOs with poor business cases and governance.


But the strong, anti-fragile blockchain protocols are just emerging on the asset class journey.  We are not at the tech commercialization starting line as in 1992, nor the first iteration Web 1.0 finishing line of 1999, but rather somewhere like 1994.



If you have enjoyed reading this extensive report, discover even more published by Forbes here: https://www.forbes.com/sites/apaul/2017/11/27/its-1994-in-cryptocurrency/#64e4523b28a3