Cryptocurrency winter: "To drink beer, you must first drink the foam"

Recently, the five departments including the China Banking and Insurance Regulatory Commission, the Central Cyberspace Affairs Commission, the Ministry of Public Security, the People's Bank of China, and the State Administration for Market Regulation jointly issued a "Risk Warning on Preventing Illegal Fund Raising in the Name of "Virtual Currency" and "Blockchain". The cryptocurrency industry is once again facing strong regulation.

It’s only been more than half a year since the carnival at the beginning of the year. At that time, with the price of Bitcoin breaking through $20,000, everyone in the famous blockchain community “3 o’clock sleepless blockchain group” was saying, “In the blockchain industry, even sleeping is a waste of time.” “All in,” “Faith” and other buzzwords in the industry, everyone felt that they would become the next “cryptocurrency circle wealth creation myth.” However, in just half a year, various blockchain communities have fallen silent one after another, no longer as lively as before.

Data shows that as of August 31, 2018, the total value of the 1,911 digital currencies counted by the website was around US$220 billion. Compared with the high of more than US$830 billion in February this year, more than US$610 billion has evaporated.

It is worth noting that unlike the joint document issued by the central bank and seven other ministries on September 4 last year that defined ICO (initial coin offering) as illegal fundraising, this round of currency price decline has not spared even mainstream currencies such as Bitcoin and Ethereum. Retail investors, known as "leeks", have gradually lost their "faith" and have criticized various blockchain project parties.

Where will blockchain projects go in the bear market? Where will the development of blockchain technology go after encountering strong regulation? There are many questions that need to be answered.

Most of the air coins will definitely not survive

"Many projects raised too much money before." Da Hongfei, founder of NEO and Onchain Distributed Technology, described the bear market in the cryptocurrency circle as a process of deflating bubbles and cooling down the market with too strong speculative atmosphere.

Da Hongfei has been involved in many blockchain projects. When the market is good, he is often shocked by the amount of funds raised by the project parties. "With the same team background and similar maturity stage of the project, in the traditional VC (venture capital) market, it is amazing to raise a few million dollars with a white paper, but some blockchain projects raise tens of millions of dollars or even hundreds of millions of dollars." He believes that this far exceeds the value of the project and the actual needs of the project party.

"Why does it fall? Sometimes it's because it has risen too much." Da Hongfei said that in the blockchain industry, there is no good way to make a correct valuation, and there are not many fundamentals to look at, so the valuation of projects is heavily driven by emotions. Now the market lacks confidence, and the valuations of many projects have naturally come down.

According to the "Bitcoin Digital Currency List", 58 new currencies were launched in July, and as of July 30, a total of 41 currencies broke their issue prices, with a break-even rate of 71%. The market value of these 41 digital currencies shrunk by an average of 48.26% compared to the first day of public issuance, and some currencies even returned to zero on the first day of issuance.

Previously, many projects would manipulate the market after they were launched, by colluding with relevant blockchain media to absorb chips at low prices and then sell them at high prices to increase or maintain the price of the currency. But now that everyone has started to sell, no one is buying, and the price will only get lower and lower.

“Everyone is too anxious now, blindly pursuing returns from the capital market. Few teams are doing practical work and telling different stories, but in fact their lifespan is short. In this round of bear market, most of the air coins will definitely not survive.” Hu Guonan, partner of Spark Digital Capital, commented on the current market.

On August 14, Ethereum plunged nearly 20% in a single day, adding a milestone footnote to this bear market. The consensus in the industry is that the bull market caused by the Bitcoin halving in 2016 and the birth of Ethereum ICO smart contracts in 2017 has completely ended. Due to the constraints of the underlying blockchain technology, distributed applications based on blockchain still cannot meet the requirements of more people. "Therefore, this round of bear market is likely to continue until the next Bitcoin halving or the emergence of a real DApp (distributed application) hot application." Liu Siyu, founder of Top Fund Blockchain Fund, said.

"When the price of Ethereum fell rapidly, the project team originally expected to spend three years' worth of money, but now they can only spend two years. If it falls further, it will cause some unpredictable consequences, so they will try to lock up some of the US dollars first." Da Hongfei said that the more you fear the price of the currency will fall, the more you will sell it; the more you sell, the faster the price will fall, which is a vicious cycle.

"Many projects do not have the ability to be implemented and generate revenue, and they will definitely not survive. It is better for them to cash out and exit, which is equivalent to running away." Pinmo Chief Strategy Officer Li Yiwei said that many projects around him have actually collapsed because the project parties have no money; those that still have "surplus food" on hand have also become much more cautious and have slowed down their expansion.

Look at the project more rationally

The bear market in the cryptocurrency world has shattered the dreams of many project owners, and even token funds (blockchain investment funds) are not immune. "To a certain extent, it can be understood that most token funds no longer invest in blockchain projects, or rarely invest in blockchain projects," said Liu Siyu.

Relevant data shows that the overall amount of blockchain project financing in August fell by more than 90% compared with January.

"Money is more cautious." This is the feeling of Huang Huarong, architect of Huobi, founder and CEO of OneChain. He described the current blockchain industry as a besieged city, and the people in the city are suffering. "Some token funds have invested in many projects before, but they will return to zero if the projects are not implemented. The cost of buying was relatively high at that time, but now it has dropped. The losses are high and the pressure is high, which is a headache for them."

"We invested 10,000 ETH (Ethereum) last quarter, but we decided not to invest this quarter and do more research. Now the investment is more systematic and not as blind as before." Hu Guonan said that when the market is good, even if the project is not good, but knowing that the inside information will push up the price, Hu Guonan's team will still invest, "the purpose is to make money", but now, "some air coins may be popular, but they can't make money, so we won't invest in them, but choose to invest in some strategic projects."

Hu Guonan told China Youth Daily and China Youth Online that the token fund market is somewhat chaotic, and the previous high price of coins was largely due to the hype of some token fund traders. "These investors basically have no investment experience, and many are very young. The youngest ones were born in 1997 and 1998. They have a one-sided understanding of the market and can only pursue some popular projects through their own resources."

Hu Guonan said that due to the policy prohibiting ICO, some investors registered main funds overseas. In the past, when the market was good, these individual investors accumulated a lot of original wealth invisibly; when the market was bad, they used too much leverage and suffered heavy losses. "I saw a 'kid' around me who had 20 million yuan in funds a few months ago, but now he has even sold his house in China."

The crash has taught token funds to look at projects more rationally. "When I invested before, I focused on whether the project was popular, whether it was hot, and whether the idea was new. Now I pay more attention to the team's own successful record, what they have done, and what successful experience they have." Hu Guonan is trying to accompany the project parties and help them with services and incubation. He said that he would get tired of hearing too many stories. No matter how beautiful the white paper or how touching the story is, it is not as authentic and trustworthy as a line of code or a real product.

Huang Huarong also mentioned the other side of the "siege". VCs outside the city have been eyeing the blockchain pie for a long time. Previously, the price of coins was too high and they could not compete with the cryptocurrency funds. Now, "if the price of coins continues to fall, it will be an opportunity for them to come in."

Blockchain is still in its early stages and the technology is still being perfected

"Do you need to recharge your faith?" This is a helpless joke, but also a serious question. What impact will the decline of the currency circle have on the blockchain circle? Will the capital winter hinder the pace of blockchain innovation? How do project parties deal with the transition from bull to bear? After the bubble bursts, will it be a mess or fragrant beer? Practitioners in the industry have their own views on this. In their view, the current blockchain industry is still in its infancy, and the immaturity of concepts and technologies will bring some chaos and risks, but because of this, the imagination space in the future is also unlimited.

"At present, the number of entrepreneurs and cryptocurrency users involved in blockchain still accounts for a very small proportion of the global user base. Therefore, if blockchain technology truly achieves a breakthrough, the next digital currency bull market will be much higher than the high point in January this year." Liu Siyu is still a "believer" in blockchain technology. He believes that with the continuous breakthroughs in technology, the future of this technology has great potential.

Talking about the current development of blockchain technology, Liu Siyu admitted that blockchain is still in its early stages and the technology is still being improved. "For example, the main chains that everyone has seen, such as Bitcoin and Ethereum, are not yet sufficient to support large-scale applications due to their low performance, but new main chains such as EOS have failed to meet people's expectations and have not made breakthroughs in performance and security."

Da Hongfei also believes that the infrastructure of blockchain is still very imperfect at this stage. "At this time, it is very difficult for you to do many so-called practical applications. It is similar to the late 1990s when the domestic Internet infrastructure was not yet perfect and you wanted to do e-commerce."

Technology is the first obstacle. Between the underlying chain and the application, tools need to be developed to reduce the difficulty of application development, which is also an obstacle. After the application is developed, it still needs to be tested by users and requires a process of user accumulation. Huang Huarong said that various obstacles have limited the further development of blockchain. But he firmly believes that in time, the "killer application" of blockchain will definitely appear.

Liu Siyu is full of confidence in the future. He prefers to invest in blockchain underlying protocol projects in order to solve the problem of blockchain infrastructure construction. The more projects he looks at, the more confident he is in the development of technology.

Well-known angel investor Xue Manzi has a saying that is widely circulated in the cryptocurrency circle, "The bubble of blockchain is like beer bubble. Few people can really drink beer, and most people are choked to death by the foam." Another version of this saying is, "To drink beer, you must first drink the foam."