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| Well, that's one way to short a circuit board... |
The graphic was meant to illustrate how new tech generally goes through a cycle.
The cycle starts with a massive amount of excitement from the over-exaggeration of the impact and usefulness of the innovative technology, followed by reduced interest as the true usefulness is questioned, and then eventually second and third generation products which use the new technology in a more widely accepted and useful way emerge.
Using some vague keywords relating to what I remembered about the graphic, I managed to dig it up – turns out my memory was not too far off! The phenomenon is known as the Hype Cycle and it represents the adoption of a new technology as it transitions through 5 different phases.
Wikipedia describes these 5 phases in detail – I have put a shortened version of it below:
1
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Technology Trigger
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A potential technology breakthrough. Media interest, but often no
usable products. Commercial viability is unproven.
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2
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Peak of Inflated Expectations
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Early publicity produces a number of success stories—often
accompanied by scores of failures.
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3
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Trough of Disillusionment
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Interest wanes. Producers of the technology shake out or fail.
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4
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Slope of Enlightenment
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More instances of the technology benefit start to crystallise. Second-
and third-generation products appear.
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5
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Plateau of Productivity
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Mainstream adoption. Broad market applicability.
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The short and sweet version of all this is nicely summarised by Amara's Law:
“We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run”
Now I am certainly not saying that cryptocurrencies will go through this Hype Cycle, or that Amara's Law applies to them – you can draw your own conclusions on that. But consider the following:
- Bitcoin has been, and still is, the cryptocurrency with the largest market cap, I therefore think it is reasonable to use Bitcoin as a proxy for cryptocurrencies in general (yes each of the other’s have their own unique attributes, quirks and strengths, but bear with me).
- Then, I think it is also a fair to consider that the price of Bitcoin is a good indication of the public perception of the potential and future usefulness of Bitcoin? Below is a chart of the price of Bitcoin from beginning 2017 until more or less the present day (shamelessly stolen from this website).
- Now, things get really interesting when I overlay the interesting part of the the public perception of the potential and usefulness (read price) of Bitcoin over the Hype Cycle chart. (Excuse my photo-shopping skills, and by Photoshop I mean Powerpoint)
To further expand on this, allow me to add some additional
comments in relation to the Wikipedia description of the 5 phases of the Hype Cycle and how it
could relate to cryptocurrencies:
Hype Cycle Phase
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In Relation To Crypto Currencies
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1
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Technology Trigger
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The use of
blockchain and the distributed ledger as a means of authentication and trust
for transactions, and then tying the creation of currency as a reward for
facilitating the transaction, was a novel idea which could certainly be viewed
as a technology breakthrough.
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2
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Peak of Inflated Expectations
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Public
interest in cryptocurrencies exploded and turned into a full blown frenzy
towards the end of 2017. Investment websites started displaying Bitcoin
prices and charts, stories of people becoming multi-gazillionaires overnight
emerged, and billions of dollars were raised in initial coin offerings. At
the same time, there was talk of regulations and we heard stories of coin
exchanges getting hacked.
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3
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Trough of Disillusionment
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More recently, some of the heavy weights started expressing doubts as to whether there would be a future for cryptocurrencies. The current
price of Bitcoin certainly indicates that interest is not what it used to be.
Could it be that people are starting to question the true usefulness and
viability of cryptocurrencies in their current form?
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4
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Slope of Enlightenment
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There have
been some new applications of cryptocurrencies which have launched with
applications ranging from contracts, to identity verification. Whether these
can be classified as Second or Third generation products, I am not sure - but
the technology has been evolving into new applications.
There is a definite possibility that the technology will be deployed in novel, exciting and unexpected ways.
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5
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Plateau of Productivity
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Will we see
mainstream adoption and commercially viable and successful cryptocurrency
products? We certainly could - time will tell!
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So When To Invest In Cryptocurrencies (If Ever)?
The short answer - no one knows!In truth, there may never be a time to invest and all this could go up in a cloud of smoke. But then again there could be incredible new products and services in the cryptocurrency industry. These could emerge tomorrow, next year or only in the next decade. What to do?
Well here is the way I see it:
- If commercially viable and sustainable products, services or applications emerge in the cryptocurrency field, we will see more and more cryptocurrency businesses popping up.
- Some of these businesses will end up on stock exchanges around the world - we may even see a whole new Crypto market sector emerge.
- As these businesses grow, the bigger, more profitable ones will start being included in broad based indices.
- And now I think you can see where I am going with this….
Luckily this is something I never have to stress about – because if the cryptocurrency industry ever becomes “investable”, my passive index funds will naturally start picking up the various companies which have deemed themselves profitable and stable enough to be included in the index. That, in my view, would be the right time to invest in cryptocurrencies, and it will happen automatically.
So if and when that day ever comes – I am sorted!
Who knows, maybe index funds start paying dividends in Bitcoin? If that happens, you will know for sure that cryptocurrencies have arrived!
Till next time, Stay Stealthy!
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