14,000 Casualties: Long Live Crypto

MOST of the attention directed towards cryptocurrency is given to Bitcoin and Ethereum – which is understandable to a point, given Bitcoin is the OG and represents around 50% of the crypto world’s entire market cap and Ethereum is the second biggest at around 17%. But what of the long list of other projects that have enjoyed varying degrees of success over the years writes Temple Melville, CEO of The Scotcoin Project CIC.

Figures from CoinGecko show there have been more than 24,000 cryptocurrencies listed on its website since 2014. Of that total, just over 14,000 have since died – a failure rate of nearly 60%. While that might sound high, it is more or less in line with any other type of business. In the UK, for example, just 38.5% of companies founded in 2016 were still operating in 2021 according to one study.

Timing Is The Issue

Still it begs the question: what are we to make of the never-ending issue of more cryptocurrencies? Looking at the launch timing of some of the ones that failed feels like a reasonable starting point.

The projects launched in 2021 had by far the most failures, with 5,724. In a distant second was 2022, with 3,520, while 2020 had 1,806. It doesn’t feel like a coincidence that these were the pandemic years, when many people were sat at home with time on their hands and little opportunity to spend their money.

Quite a number of the failures from these years – and others – will be scams and ‘pump and dump’ schemes. The latter refers to cases where the price of an asset is manipulated by those who own it so they can make a lot of money quickly and leave others holding ‘the bag’. This was particularly easy to do when many people who had no exposure to crypto became interested by the wild price swings that were an almost daily occurrence during Covid-19.

However, even when you remove these, it’s likely that there are still a large number of legitimate projects that had a business plan and every intention of executing it. Why did they have to wind down their operations or simply disappear?

Fit For Purpose?

Well, in the vast majority of case, they probably had no earthly use – and many of them were never going to. They might sound like good ideas, but there are an awful lot of projects purporting to provide a solution to a problem that either doesn’t exist or too few people need solved.

Part of the problem here is the ‘tech bubble’ – not the events that led up to the stock market crash of 2001, rather a small group of people who have what seems like a great idea and convince themselves it will make their fortune. What they too often forget to do is validate that idea with someone who actually has the problem they want to address.

Another part of the problem is that the people with the money to invest quite frequently have no real knowledge of what they are investing in. A project looking for funding can bamboozle them with jargon and big ideas, and there’s always the chance it could be the next Intel or Facebook.

So, why not invest $250,000 from a $50 million fund and see what happens? Just because a project has venture capital or private equity backing doesn’t make it a sure thing – these types of firms diversify their investment to tolerate the risky nature of the businesses they invest in.

The Whether Forecast

The final major point to consider is the use of forecasts – many of which sound great, in theory. But remember the wise words of Warren Buffett: “We’ve long felt that the only reason for stock forecasters is to make fortune tellers look good.”

By extension, that applies doubly to crypto. Pay no attention to the micro and maxi excitement about short-term price rises or profits made. You will never call it right and the stories of those who do are of one in thousands – probably more, by the law of averages. The businesses that have proper plans with an actual ‘thing’ that they do will survive and prosper.

Whether you are investing in a fledgling crypto project or in a start-up that has nothing to do with the sector, make sure what they are doing actually has some real-world use. Both are high-risk investments and when you invest in small companies in any industry, the platform you do it through is obligated to remind you of that.

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