Most strategic plans involve projecting events into the future, often between 3–5 years, or about half of a normal business economic cycle. A few firms in very capital-intensive or regulation-controlled industries might look ten or more years into the future, but these exercises are usually meant to fully account for the business life of a major capital investment or R&D program into a new drug.
Projections for future demand and pricing are almost always simple extrapolations from today’s environment. Often planners will look back a few years, calculate the rate of growth across the history and project that the rate of growth will be sustained into the future. This is momentum planning, and actually works well for short periods. Sales for August should look a lot like sales levels in July.
However, one of the key observations I’ve made over 30 years of building strategic plans is that long term planning has very little to do with near term momentum-based forecasts. Rather, there are two critical factors that should dominate your thoughts.
First, you need to understand the critical uncertainties that will have a huge impact on industry structure and the value chain — the possible events that will change all of the assumptions about supply, demand, prices, share patterns, and competitive behaviors. Peter Schwartz introduced the concept of scenario planning in his book The Art of the Long View (1991); this tool helps leaders explore their core assumptions about industry structure and behavior and describe a number of possible future environments under which the project or firm might operate. There are five major sources of seismic shifts that planners need to explore — social, technological, economic, environmental (or ecological), and political (including regulatory change). These five dimensions may be abbreviated as STEEP, making a useful mnemonic. Usually one or two uncontrollable possibilities will jump out as having a major impact on the desirability of the future opportunity; at that point, the team should look for early signals that might suggest that the future will look like one or another of these “high impact” scenarios.
The second dimension has to do with the will of the team — the decisions that the team leaders take to influence the outcome to happen in one particular way. If a particular political environment is extremely favorable, then what can we do to lobby the decision makers to enable that regulatory environment? If a certain resource is extremely limited, what can be done to either expand the availability of that resource or to maneuver our project so we can take the lion’s share of that resource? Again, a handful of critical decisions and changes can often make a huge difference in the likelihood of success for a particular strategy. Bend the odds to favor the project team.
The StreamSpace project is an entrepreneurial blockchain team with the vision of disrupting the Streaming Video on Demand (SVOD) film industry. Today’s environment favors the largest provider, Netflix, along with the four broadband ISPs that share about 70% of the US market — AT&T, Verizon, Comcast, and Charter Spectrum. The supply side of the film industry is dominated by ten studio/distributors, each with a slightly different target audience and appetite for medium vs large budget investments to promote and merchandize their film offerings. The studios are starting their own consolidation process, with Disney planning to absorb most of Fox’s content businesses over the next year or so. Disney, which already owns 60% of Hulu, plans to launch a competing SVOD platform again Netflix.
Against the expected collision between Disney and Netflix, StreamSpace believes we can work closely with independent filmmakers and bring compelling content to consumers who will be otherwise ignored — those who seek great stories over lavish blockbuster productions.
The StreamSpace scenario challenge involves two dimensions of critical uncertainty — what role the SEC and related regulators in other major countries will take regarding blockchain crowdfunding programs such as ICOs, and the elephant battleground environment that is looming between Disney, Netflix, Amazon, and Google.
Against that backdrop, we are pulling beyond our expected weight by building loyalty to the indie film community, championing regional filmmakers and festivals in our search for great stories. This is a “Moneyball” strategy for the film industry. We are not seeking billion-dollar returns; we are looking to help filmmakers build successful brands and passionate follower communities and grow from project to project profitably.
Come join our community and participate in our project!
James Surowiecki, a finance journalist at The New Yorker, wrote the fascinating book The Wisdom of Crowds in 2004. Conventional wisdom suggests that you should listen to experts — titans on Wall Street, business executives, the rich and famous. Surowiecki’s unconventional insight was that regular people often have a better collective sense of what is right. As fans of Who Wants to Be a Millionaire know, “Ask the Audience” was by far the most valuable lifeline on the show. Even if you know a good set of experts, soliciting the advice of a few hundred strangers beat “Phone a Friend” by a whopping 91% versus 65% success rate.
There are limits to this policy, of course: it only works when the crowd providing the answer are truly acting independently without information provided by others. The game show was a perfect test environment — the crowd has just a few seconds to select an answer from four options, and only the final percentages are revealed. When people influence others, the technique fails. Look at stock market boom and busts, mass riots, and other irrational crowd acts that “can similarly be explained as the outcome of a series of mutually reinforcing decisions.” [ref. Skidelsky]
The recent roller coaster of cryptocurrency prices, especially Bitcoin’s explosive rise to $20,000, followed by a 40% drop in five days, is an example of crowd behavior gone awry. Public awareness of bitcoin has grown dramatically over 2017, from a brief mention in a Super Bowl commercial in February to weekly updates on regulatory policies in Spring and Summer to the launch of three bitcoin futures listings in December 2017 after they won approval from the US Commodity Futures Trading Commission regulatory agency. Each step has built awareness of cryptocurrencies, particularly bitcoin, among the general public.
So far, the vast majority of people are aware only of bitcoin, and the most frequently asked questions are “What is it?” and “How do I buy it?” More common awareness of other coins is only just emerging now; there is almost no awareness of coins with lower market capitalizations beyond the top 10. Nonetheless, the term “ICO” has entered mainstream conversation in much the same way that “IPO” became a mainstream term in the 1990s during the dot-com boom phase.
To be sure, there are plenty of “scam ICOs,” projects that exist solely to line the pockets of the founders. One project, called a “Useless Ethereum Token,” took this observation to a satirical level, raising more than $300,000 by telling investors that the funds would only be used to buy a big-screen TV. The Long Island Ice Tea company changed its name to Long Blockchain Corp, and saw its stock value climb by 500% for a while. As Yogi Berra famously said, “It’s déjà vu all over again.” Remember Pets.com?
But beyond the crass promotions and unrealistic promises of outsized investment returns, the blockchain truly is enabling a wholly new wave of entrepreneurs to address market inefficiencies and attack monopolies and cartels. Most of these experiments will fail, just as most venture-backed startups fail, but the winners will truly change our lives. Prepare for a wild ride, similar to the birth of the internet in the early 1990s. And hold on for dear life.
- Skidelsky, Edward. “Always ask the audience,” The Telegraph. http://www.telegraph.co.uk/culture/books/3620109/Always-ask-the-audience.html June 28, 2004. Accessed Jan 5, 2018.
Initial Coin Offerings have been in the news heavily throughout the past year. Also called Token Sales, ICOs are a method for blockchain projects to raise funds without diluting the equity held by the founding team. There are three kinds of tokens commonly encountered: security tokens, which are assets that represent convertible units of value, meant to be traded through exchanges or redeemed for fiat currency when exiting the service; equity tokens, which represent ownership shares in the project; and utility tokens, assets that have no inherent value but are required to implement the service.
The majority of token types sold over the past couple of years are security tokens, assets meant to be tradeable or redeemable. Some are explicitly stores of value, like Bitcoin, Ripple, or Tether, while others are assets that people buy to use the service, including a number of gambling blockchain sites. While customers may not explicitly seek profits from their investment in these tokens, they do expect that the tokens will at least hold value while they use the service. Gamblers using tokens are hoping for token paybacks that they can redeem for fiat; Tether buyers seek a dollar-equivalence to hold funds between cryptocurrency investment cycles.
From an accounting perspective, utility tokens represent an asset held by the entity, and token sales generate extraordinary income for the business, offsetting accumulated and future operating losses as the project evolves from a pure R&D entity to a business with revenues and expenses.
A historical look at the blockchain industry shows that the industry is rapidly moving away from Bitcoin to embrace a multitude of tokens. A year ago, bitcoin was nearly the only cryptocurrency of note: Bitcoin controlled 85% of the total market capitalization for all cryptocurrencies and was the only currency worth more than $1 billion. Six months later in July, the total industry value had grown by a factor of 4x, and there were six tokens worth more than $1 billion in market capitalization, with Bitcoin holding just under 50% of the total capitalization value.
This post is actually going to teach you how to avoid getting scammed or phished during ANY ICO token sale, but as the StreamSpace launch gains traction and we receive more and more attention, there are inevitably going to be some scammers trying to con you out of your money.
We cannot repeat our advice enough times: the only place you will ever see a contribution address is at the StreamSpace ICO web page, https://www.stream.space/ICO . Even if others say they found the address on our website and post it on Telegram or elsewhere, do not send funds to it.
The address will be displayed here once we open our presale, between January 8 and January 15.
Still, we have a modest hard cap and a lot of growing demand, so it’s possible that people will panic and make mistakes. This post is here to make you aware of the kind of tricks we’ve seen scammers play in other ICOs, so you can be that much more prepared when the Fear of Missing Out (FOMO) kicks in.
Here are some steps you can take to avoid getting scammed.
Step 1: Bookmark https://www.stream.space
By adding it as a bookmark and only visiting us through that bookmark, you’re always going to end up on the correct site. You don’t want to type it in manually, make a typo, and end up on a fake site with a fake contribution address. You’re currently reading this post on our Medium blog page, which is a different URL than the StreamSpace ICO page. Here is the correct link to the ICO offer page: https://www.stream.space/ICO . The link will open in a new tab, so visit it now, add it to your bookmarks, and come back.
Also, if you google “StreamSpace” you may see a scammer with a fake site as well. It could be something like StreamSpace.co or StreanSpace spelled with a lower case n instead of a m or some other minor change.
Always, always double-check any URL you visit, and use the bookmarks, preferably based on emails you receive from us after registering for our ICO sale. See step 2.
Step 2: Check the sender address for any emails you receive
Another common scam is an email where the scammer has said the “From” name is StreamSpace, but in fact it is not us. Any email you receive, make sure it comes from email@example.com, firstname.lastname@example.org or email@example.com (and again, check for spelling errors), and not simply “StreamSpace” with a different sender address. The exception here is if you contact us and a member of our team replies, in which case make sure it comes from an @stream.space address. Even then, we’ll never share a contribution address over email.
It’s also possible, though unlikely, that someone could spoof the email address so it looks like it’s from us when it’s not. This is why we need to mention for the billionth time that we will not share the contribution address over email.
Step 3: Don’t believe anyone who shares an Ethereum or Bitcoin contribution address to you in Telegram, Reddit, Facebook, Twitter, Email, or any other media site.
Even if it looks like it’s coming from a member of the StreamSpace team. Even if it’s in the announcements channel or the public group, and especially if it’s sent via a PM.
See the introduction above; the only place we’ll ever share the contribution address through the StreamSpace ICO web page, https://www.stream.space/ICO .
Step 4: If you’re unsure about anything, ask us!
You can ask us in Telegram or through our BitcoinTalk forum thread, but it’s better to email us at firstname.lastname@example.org .
As long as you use your head, reference this article, and make sure to verify you are on the right site, everything will be all right. This article is here to make sure silly mistakes don’t happen.
Thank you for joining StreamSpace’s ICO! We look forward to sharing our future blockchain streaming video service with you and the world!
Marco Iansiti and Karim R. Lahkani published an article in the Jan-Feb 2017 issue of Harvard Business Review called “The Truth About Blockchain,” offering their opinion on this emerging technology and the huge amount of hype that has surrounded it.
Their thesis is that new technologies find homes across a range of applications, from simple “Single Use” functions where the technology makes an existing process more efficient to complex “Transformation” functions that dramatically change industry structures.
Single Use applications are the most straightforward ways for new technologies to become adopted. Users, familiar with existing processes, see the new technology as an enhancement that provides a clear benefit at low or no cost. Often, they will turn to an existing supplier or internal department and expect that they will simply see a reduction in cost, greater efficiency, or higher performance or capacity that comes from adopting the new technology. Examples abound in many industries and consumer applications — acetaminophen cured the same headaches as aspirin with a similar dose and frequency but without stomach upset complications. Bitcoin futures trading launched on December 1, 2017 through two Chicago-based exchanges, CME Group and CBOE. As far as these two exchanges are concerned, bitcoin spot pricing, established by Gemini, is not much different from spot pricing for West Texas Intermediate crude oil or soybeans. Similarly, we are seeing a handful of luxury goods dealers accepting bitcoin alongside fiat currencies. There have been many publicized examples of people exchanging their rapidly appreciating bitcoins and Bitcoin Cash, worth about 20x the level of just one year ago, for condos, exotic cars, and art. Burger King in Russia created a cryptocurrency they call WhopperCoin, which acts as a promotion incentive in their fast food restaurants. Every ruble spent on a Whopper earns one WhopperCoin. After accumulating 1700 WhopperCoins, consumers can exchange their tokens for a free Whopper sandwich.
The second stage of adoption involves technical substitution. In this mode, the core process functions do not change, but new firms and offerings displace older ones. According to CoinATMRadar, 61 countries now support almost 2000 bitcoin ATMs, in which cryptocurrency holders can buy and sometimes sell bitcoins or other cryptocurrencies. The US leads this industry, with 64% of the installed base of these devices. Bitcoin gift cards (essentially hardware wallets) are available from Amazon and other web retailers. There are dozens of blockchain-based gambling sites such as True Flip that have emerged in the past 18 months. Some geographies like Malta are friendly to gambling sites, and blockchain gambling adds anonymity as well as performance transparency to this large, established industry.
The third stage in the adoption of blockchain technologies involve new local services, often previously not available except to or through a few parties. Bitcoin has become a useful tool for low cost cross-border money transfer. Until a year ago, almost all person-to-person foreign exchange payments went through a handful of high cost services such as Western Union or Moneygram. Bitcoin transfers take place in the time it takes to send and receive an email, and the currency conversion fees are approximately half of the level charged by the major incumbents. IBM recently introduced its AI-based Watson IoT and Hyperledger initiatives to connect business partners to share and analyze IoT sensor data. The IBM Blockchain smart contract acts as an independent third party to certify the authenticity of the content. Interbank clearing and settlement is an unsexy back office function that costs the investment banking community billions of dollars to run and audit. Depository Trust and Clearing Corporation (DTCC) is working with IBM, R3, and Axoni to shift post-trade clearing of single-name credit default swaps to a blockchain system.
These three stages are sustaining innovations with increasing impact on industry costs, but do not necessarily disrupt the overall industry value chain. The fourth stage, however, involves a total overhaul of the core industry structure with blockchain systems tearing apart the normal centralized command and control structures. In this final stage, smart contracts replace the expected role of a trusted master owner for the marketplace; buyers and sellers agree independently on terms for their own transactions, and they publish their decisions and certify that each has held up their end of the bargain. There are hundreds of blockchain projects aimed at one or another specialized marketplace, from sensors (IOTA) to energy (SolarCoin, WePower), healthcare records (Patientory, MedRec), identity management and security (ABT, CUBE), and media content rights management (StreamSpace, SingularDTV, Mycelia/UjoMusic, Revelator).
These disruptors are most successful when they target unserved or underserved segments of users that do not place a high value on the conventional services provided by the centralized incumbents and their preferred value chain partners. Netflix is busy becoming a major content developer studio, partnering with the dominant broadband service providers, AT&T, Verizon, Comcast, and Charter Spectrum to ensure superior viewing experiences through its CDN. Google’s YouTube TV is looking to become a cable replacement service, offering live TV streaming to smartphones and smart televisions. Alternative service providers will succeed when they bring unique content that appeals to people who want something different — independent media content, foreign news and entertainment, specialized educational content or online classes, and interactive virtual/augmented reality services, among others.
Today, December 14, 2017, is being treated by many people as the last day for a “free internet,” since it is pretty clear that the FCC chairmen will rule 3:2 and overturn the Open Internet Ruling established in 2015 with its new “Restore Internet Freedom” Order.
The opinions of each of the five chairmen has been clear for months, if not years. The current Chairman, Ajit Pai, and Commissioner Michael O’Reilly each published lengthy dissenting statements as attachments to the 2015 Ruling, outlining their arguments as to why the FCC should not have enlarged its definition of basic (Title II) carrier services to include broadband internet access services.
The third Republican Commissioner, Brendan Carr, has been quite vocal that “the FCC vote is a win for consumers & innovation. Americans will regain online privacy protections they lost two years ago, & we return to the robust legal protections under which the Internet thrived in 2015 & prior 20 years.”
What’s happening, and why have millions of people submitted comments to the FCC?
Back in the dark ages circa 2000, the major local phone companies and the major cable service providers began deploying broadband services as optional enhancements to their basic offerings. The Telecommunications Act of 1996 established a federal priority to enable broadband services to reach all Americans, with special emphasis on the provision of broadband service to elementary and secondary schools and classrooms (Section 706).
For the past 15 years, the FC has published semiannual updates showing the progress in deployment of broadband services on a county-by-county basis. At the same time, the FCC has explored the definition of “broadband,” periodically updating its definition as new services are introduced that test the limits of high speed service access. Today, “broadband” internet means local service with a 25 Mbps downlink and 3 Mbps uplink speed, or multiuser service with 100 Mbps to cover a 1000 user population (common in public secondary schools). About 83% of US households currently have access to at least one qualifying broadband service, but there are thousands of rural counties across the nation where that standard is not possible, and where less than 10% of residents can obtain high speed services.
Three forecasts for the future of broadband services
The top four broadband providers — Verizon, AT&T, Comcast, and Charter Communications — form an oligopoly for residential broadband services, with the two cable companies holding near monopoly positions for fiber-cable service in their respective geographic locations, and AT&T and Verizon sharing over 60% of their respective core telecom markets. Together, the four top companies share 74% of the US broadband industry. The four top companies have each spent most of the pat 20 years buying and integrating competitors and adjacent businesses, cementing their roles as integrated broadband services providers. For each of the past five years, AT&T and Verizon have been the #1 and #2 investors in capital infrastructure among US companies, surpassing ExxonMobil and the other major oil and gas companies as well as the entire population of major internet and tech companies. The only significant acquisition that has been halted during the current administration was the proposed merger of AT&T and Time Warner, which would have combined a huge content owner with one of the major broadband ISPs. It seems very likely that the four top broadband competitors will continue to increase their aggregate market share by acquiring more secondary or regional firms and by continuing to raise the bar on investment in infrastructure in their major service areas.
One of the claims of the pro Net Neutrality forces is that changing the FCC regulatory environment will allow ISPs to either block or charge separately for access to specific popular services, such as Facebook or Netflix. That is not and has never been part of the core strategy for any of the top firms, but it is highly likely that the firms will streamline the deployment of some of these specific high bandwidth services, especially the two named above, and enable preferential treatment for users who choose to pay for premium plans. Instead of just seeing rates that promote 25 Mbps or 50 Mbps, you will see rates for streamlined 4K video service, potentially naming specific content channels. One of the side effects of this policy would be that the top content service providers — Netflix, Disney, Time Warner — would take even more share of the total service market, while specialty stream services (including StreamSpace’s own blockchain film streaming service) might face an uphill battle to be treated as an equal application service.
Lastly, the next generation of commonly-used broadband services will likely be wireless 5G services, more than fiber-based. AT&T and Verizon recognize that the next wave of capital investment will be for 50–100 Mbps wireless broadband infrastructure, aimed to both stationary users (residential wireless) and mobile consumers, including both automobiles and smartphones. The sheer cost of keeping up with AT&T and Verizon will make it more likely that smaller service providers drop out. Sprint and T-Mobile are losing capital support from their major investors, Softbank and Deutsche Telekom, now that the proposed merger between the two Tier 2 competitors failed in late October. No smaller wireless provider has anywhere the level of capital reach necessary to be competitive in 5G outside of highly focused metro service experiments.
But all of these trends have been apparent for the past two decades, from the early days of hybrid fiber-coax and DSL and LTE 3G wireless service. What is changing is the nature of the content that people are expecting to see from their broadband service — more video, much more complex internet websites with continually updated feed content. The most popular websites in the US today are Google, Facebook, YouTube, Amazon, and Verizon’s Yahoo, all companies that date back only 25 years or less. All of these sites have been increasing their share of traffic, enhancing their services with more complex video content and increasing the amount of time and money their users spend on each of their sites.
The future is already here. Innovation still matters, but the major buyers for innovation are becoming more centralized. We see this in the shrinking of the public stock markets even as the value of those markets continues to rise. More and more industries are becoming more concentrated, resulting in higher prices and profits. Moving regulation of the broadband industry from the FCC to the Federal Trade Commission, alongside most other industries, does not bode well for the long term health of the internet, one of the few segments where young innovators have been successful in the past 20 years.
Jose Tormo did some lobbying to the FCC and Congress in 1995–6 as an employee of Motorola, one of the inventors of both ADSL silicon and cable modems and the largest provider of wireless communications equipment in the United States.
- FCC Report and Order on Remand, Declaratory Ruling, and Order, GN Docket №14–28, Adopted February 26, 2015, Released March 12, 2015. https://apps.fcc.gov/edocs_public/attachmatch/FCC-15-24A1.pdf
- Carr, Brendan. https://twitter.com/BrendanCarrFCC/status/940991727648804864 Twitter post, December 13, 2017.
- Taglang, Kevin, Benton Foundation. “What Section 706 Means for Net Neutrality, Municipal Networks, and Universal Broadband. https://www.benton.org/blog/what-section-706-means-net-neutrality-municipal-networks-and-universal-broadband , 2015.
- Kimmelman, Gene and Cooper, Mark, Washington Center for Equitable Growth. “A communications oligopoly on steroids,” http://equitablegrowth.org/report/a-communications-oligopoly-on-steroids/ , July 18, 2017.
- Di Ionni, Michelle and Mandel, Michael, Progressive Policy Institute. “Investment Heroes 2016: Fighting Short-termism. http://www.progressivepolicy.org/wp-content/uploads/2016/10/InvestHeroes_2016.pdf , October 2016.
- Photo by Luca Colapinto on Unsplash
One of the curious facts about economic activity is that it leads to bubbles, which burst, and then more bubbles. The Great Depression led to many structural changes in both governmental oversight of the US and other large economies through national banks or reserve systems and through the private banking industries, but we still experience economic bubbles and crashes every 10 years or so. Like Tolstoy’s observation about happy and unhappy families, the growth phases all look very similar — accelerating supply and demand, leading to more and more investment in similar categories — but the bubbles and the bursts are all unique. We can observe the characteristics of bubbles and draw insights about what made them happen, but it is very hard to use those insights to predict when they might burst or what remnants will survive to become new industry leaders.
There have been three significant bubbles in the past 30 years, after the Savings & Loan crash of 1985–6: the junk bond crash of 1990–91 that led to a minor credit crunch and recession, the dot-com crash of 2000–2002 that had a major impact on the tech industry but did not dramatically affect the US economy, and the housing crisis of 2007–2009 that led to the Great Recession.
The junk bond bubble of 1989–90 was a supply-side crash against strong demand; private equity has changed a lot in the last 25 years, but the demand for high yield corporate debt and mezzanine financing is more than 10x today what it was just before the bubble broke in 1989–90. The junk bond market of the 1980s was largely created by Michael Milken of Drexel Burnham Lambert (DBL). Milken worked with two main customer groups: executives from high growth companies below the Fortune 500 who did not qualify to issue “investment grade” bonds, but who were substantially better prospects than the typical small business that gets its debt funding from commercial banks, and corporate raiders or private equity firms who were looking for large debt packages to enable leveraged buyouts. For almost ten years, DBL and their peers showed that corporations outside the Fortune 500 could afford very high interest bond packages, with typical yields of 14–15% and only 2–3% default rates. Admittedly, a lot of the yield was caused by the steady decline in inflation and expected interest rates for all classes of bonds — many muni bond funds and traditional corporate bond funds showed 10% annual returns or better across the 1980s as well.
DBL had run-ins with the Securities and Exchange Commission (SEC) and the US Department of Justice (DOJ) across much of this period as well, and Michael Milken, one of the top executives with the firm, was famous for bending and breaking SEC rules. In 1988–9, the DOJ threatened DBL with an indictment on RICO (Racketeer Influenced and Corrupt Organization Act) charges. The company settled the charges, technically retaining innocence while admitting the government could prove guilt. The company crashed and dissolved in 1990; Milken spent almost 2 years in prison. The pressure on DBL led by Rudy Giuliani for the DOJ essentially stopped the high yield bond supply in its tracks for two years. New debt issues fell from $29Bn in 1989 to $1 bn in 1990, but they recovered by 1992. Since that time, the high yield market has exploded, with significant resets happening briefly with each economic recession (2000, 2008).
The Dot-com boom ran from 1995 to 2000, followed by the Dot-bomb crash from mid 2000 to 2003. This bubble had two major contributing factors: an explosion in venture capital financing and IPOs especially by internet technology and communications companies that led to irrational firm valuations, far removed from the Price/Earnings or Price/Revenue ranges seen in the past 50 years, coupled with a change in the tax treatment of capital gains vs dividends that again pushed firms to issue equity and expand through mergers & acquisitions instead of paying dividends.
In early 2000, the telecom industry published statistics that showed that the exponential growth forecasts for internet traffic had turned out to be wrong (some companies were citing capacity growth, not actual traffic growth), and people started to realize that the “new economy” actually worked under the same financial rules as the “old economy.” Within months, venture funding slowed dramatically and a number of venture firms closed or refocused their attention on just their existing investment portfolio.
The dot-com bubble led to a loss of $1.7 trillion in stock value, mostly by the tech companies that dominated the NASDAQ index. Total valuation fell by 78% between March 2000 and October 2002; the index did not reach its March 2000 peak again until April, 2015.
Of the hundreds of firms that started during the Dot-com craze, Google / Alphabet, eBay, and Amazon have proven to be huge winners. During the 2000–2002 correction, Amazon struggled with showing the value of its business model of reinvesting profits into new growth segments; its stock price fell from a high of $106 in late 1999 to a low of $7.20 in late 2001; it currently trades for close to $970 per share. New giants like Facebook learned from the survivors that market dominance in a category segment is more important than broad coverage across many segments with low share.
The 2007–10 housing market crash had a supply side factor as well as a demand factor. The story of the Great Recession has been told over and over again, but for this analysis, I’ll refer to the growth of sub-prime mortgages across the 2000s, with the mortgage paper repackaged from the junk status that they truly were to a false claim of AAA risk level.
This graph shows is the percent of US home mortgages that were subprime or Alt-A. Until 2003, the fraction of mortgage paper well outside of prime interest rate band was only 10% of total mortgages; even with the higher default level from this class, mortgage buyers were not very exposed to default risk, and they had a good understanding of return levels over time under normal interest rate fluctuation levels. But in 2004–7, the number of new risky mortgages exploded, with developers and mortgage companies putting packages together to attract buyers no matter how unqualified they might have been. At the time, they believed housing prices were destined to climb faster than the cost of money, so it really didn’t matter whether the buyer could afford to pay the loan. The mortgage holder could foreclose and resell the property for more than the cost of the loan.
This growth and crash was caused by “irrational exuberance” coupled with fraudulent packaging of risky loans masquerading as trustworthy baskets of loans, driven by an unstable demand level by a huge group of unqualified buyers that distorted the entire mortgage market for 4 years. The crash in 2008 led to several bankruptcies and bank mergers, and eventually to a completely different approach to mortgage issuance. Subprime mortgages essentially disappeared by 2009, and even the most qualified buyers had a difficult time finding banks and other finance companies willing to offer home mortgages.
So is bitcoin in the growth stages of a bubble today?
The bitcoin market has undergone several huge price climbs and collapses in the brief eight years that this industry has existed. There have been several flash crashes with at least 20% value decline, and the value once fell by more than 80% from peak to trough (Nov 2013–Jan 2015), similar to the collapse of the NASDAQ index.
Bitcoin Price in US$, August 15, 2017:
One of the more remarkable aspects of bitcoin is how fast price corrections happen and how fast they can recover. The most recent crash in early September with a 35% loss of market capitalization was almost certainly caused by the decision of the China government regulators to ban new ICOs and to close exchanges that deal in cryptocurrencies. Several projects simply shut down, and many others have been forced to refund coins or fiat currency invested, at least by Chinese investors. Regulators from several other countries have also been aggressive in restricting ICOs, including US and Singapore. Other country regulators are issuing warnings to citizens about the dangers of investing in blockchain projects.
I see the bitcoin price increase and corrections as being similar to the Dot-com bubble more than any other financial episode in recent memory. There is a huge degree of Fear of Missing Out, with hundreds of tokens being issued to take advantage of this once-in-a-lifetime opportunity to obtain funding for blockchain projects. Like the Dot-com era, few people are doing research to investigate whether the project has any chance of success (Sock puppets to sell pet food and accessories?), or whether a blockchain might actually add any value to some hypothetical solution. The NASDAQ index hit its peak with a combined P/E ratio of 175, nearly 10x the ratio that most investors are comfortable with. Few of today’s token-backed businesses turn a profit, and it is hard to correlate the value of a token with the actual or expected future profitability of the project.
Like the internet of 1997–1999, there are some winners hiding in the crowd of undifferentiated token issuers. Some recent ICOs have resulted in unicorn-level valuations approaching $1 billion for their projects (OmiseGo, Qtum, Ripple Labs), and there are a few mega-project consortiums that oversee dozens of blockchain projects, like ConsenSys.
A new wave of corporate innovators are pursuing blockchain projects as well. While Jamie Dimon of JPMorgan Chase recently disparaged bitcoin as a worthless investment, the firm has been pursuing its own blockchain program called Quorum to enable private but secure transactions among enterprises. Many other large tech companies have similar projects under investigation. It is likely that many of the thousands of projects that are being funded today will disappear within 2–4 years, just as most startups die or are acquired and integrated into other solutions. And it is likely that a handful of blockchain concepts will become category winners and lead to new billion dollar businesses. It’s just a little hard to predict which ones will be the winners right now.
- Wikipedia. Drexel Burnham Lambert — Wikipedia.
- Sober Look. High yield debt issuance in 2012 hits an all-time record
- Credit Slips. QM Impact on the Mortgage Market
- Economist (2000). From dot.com to dot.bomb
- Business insider. Here’s Why The Dot Com Bubble Began And Why It Popped
- NewsBTC. Bitcoin Price Watch; Here’s How We’re Playing The Correction — NEWSBTC
- JPMorgan Chase. Quorum | J.P. Morgan.
- Photo by Alexandre Perotto on Unsplash
Way back in the dark ages of the early 1980s, when dinosaurs roamed the earth (at least, according to my daughter, now 19), I took an ethics class in business school. Business ethics is the study of proper business policy and practices with respect to controversial issues. Some are rather clear-cut examples of stopping people from behaving illegally — bribery, discrimination, insider trading. Others involve juggling the conflicting rights and interests of different constituencies — corporate social responsibility, corporate governance, fiduciary responsibilities of executives and board members.
There have been several examples of unethical behavior in the news lately, with Harvey Weinstein as the most recent outrageous example of unethical behavior on the part of business executives that should have known something very wrong was happening under their noses. The tech industry is not immune from unethical behavior either; Uber is facing some heavy headwinds as a result of the behavior demonstrated by its co-founder and ex-CEO, Travis Kalanick.
The blockchain industry has an unfortunate reputation for scams, and for good reason. Up to one-third of the ICOs held in the past year have been little more than donations to the project founders to line their pockets. More than a few ICOs have been hacked, with large fractions of the offered funds siphoned off by hackers. As a result, financial regulators around the world have issued guidelines to restrict either the issuance of new tokens or the participation of residents in new ICOs. And these challenges affect both small and large ICOs. CoinDash lost over $7.5 million in July to hackers in much the same manner that the DAO lost $50 million a year earlier. Tezos, one of the largest token offerings with $232 million raised and now valued at $400 million thanks to the recent appreciation of Bitcoin and Ethereum, is crashing as two leadership factions vie for control over the project.
Protocol Labs took a bold step to create a certified and ethical ICO for its Filecoin token offering, working with Cooley LLP to create a new registration process for funds raising called a Simple Agreement for Future Tokens (SAFT), based on Y Combinator’s Discount/No-Cap SAFE equity fundraising process, balancing benefits to the purchaser based on the higher risk associated with a project stake in lieu of traditional equity with advantages to a broader community that will be using and mining the tokens. The investors or donors guarantee they will hold the tokens for a period of one to three years, and they register by name and tax ID, certifying that they are accredited investors with a high income and net worth, aware of the high likelihood of loss when participating in the ICO. About a half dozen other projects have also issued SAFT agreements to support their ICOs, but this remains a rare and potentially complex legal process that befits some types of projects better than others.
StreamSpace is preparing to conduct its ICO in early 2018; we are engaged in a token pre-sale today. We are doing everything we can to show that we are conducting an ethical ICO, showcasing our founders and other team members, with links to our bios and LinkedIn resumes, a detailed white paper, extensive details about the fundraising process that we are using with price tiers based on the amount raised over specific time periods from the first 6 hours to 48 hour segments over the 28 day ICO period. We have been active in engaging our primary market, independent filmmakers, across several industry conference events and other sponsorships and speaking engagements. We published our project architecture and target development timetable, showing the progress toward beta and commercial offerings over the next year. We are building our industry credentials with help from executives with deep roots in the film and television industry. We are also building website resiliency to help make the ICO harder for hackers to attack us, either hijacking the site or hitting us with a DDoS attack. While no network is ever completely safe, we feel we are prepared for all of the likely points of attack.
If there is any doubt, please feel free to call or engage us directly through other means. We are here to make a difference in the world, and we are starting now. Come join us in Austin if you can.
Peace to you all.