I ended the post about diffusion of innovation with saying that whenever you see the protocol which is aiming to the global scene early on, run away as fast as you can from it. And I heard you saying: What on Earth should I be focusing on when it comes to cryptocurrencies?! I am glad you asked 😊
It looks like that you already forgot the first sentence there, which goes like this: Adoption take long long time, it happens through small market niches… and every huge tech company started somewhere in some tiny known or unknown market.
I see the mistake that are many people often making when it comes to thinking about the investing in start-ups and cryptocurrencies. They are starting upside down – with the other end, maximum potential is achieved, and then how much is that number of users and what’s their lifetime value. But the thing is that completely opposite is true – adoption is starting with one user.
The typical analysis of the cryptocurrency that crypto investors are making (if at all!) is starting something like this: Today, the size of the X industry is some huge number… many billions a year industry… and that industry is growing at certain pace. If this new blockchain tech take only fraction of that market, its cryptocurrency will be worth many times more than today (although using same metrics on company and cryptocurrency is wrong way to do it in the first place, but let them be).
Then they will add… how this is very conservative estimate, because this new blockchain technology is superior in this and that way, and because of that it has great potential to overthrown and eventually replace this old existing tech. If, and there is always that IF, this new tech enable new things in a new way… which will be adopted because this is way more superior than what we have today.
So you do the math, IF, remember that IF, which is a BIG IF… this new blockchain tech becomes as popular as existing tech that we are already using today, it will produce gigantic value which will result in 1000x higher price, and if it surpass it… many thousands time higher, and this is where people become really exited, BUT! There is one but, which is a BIG BUT. I say: “Ok, but how will this ultra mega giga new blockchain tech receive first user? And how will it gain second user and third user and so on? Why will they return for more?”
This is important because this is how every business is growing, and every high technology company with breakthrough tech started with zero users, and we know that in the beginning that new things are barely usable, full of bugs, clunky and so on… so how will this tech with wonderful potential receive first, 10th, 100th, 1000th, 100k users and so on?
Silence… it appears that people are not thinking about this step by step approach, which is why they are bad investors, and why you should not be listening to anyone out there.
What I have found is that this step by step approach is how cryptocurrencies (and every other tech start-up) are growing. They are growing through what is called:
Because I know that innovative technology is growing through sequencing, I am looking for a very specific way developers are working on cryptocurrency. This is what Venture Capitalists are also doing.
If they want to significantly increase chances of making a giant success, they will be looking to build technology which is first solving important problem in a tiny market, and once they successfully satisfy the needs of that niche and solution is dominant in it, then they can start thinking how they can bring this innovation to a higher level and bigger niche where it can solve bigger problems for more users. Once they succeed in that bigger market, which means that solution dominates in it, then they are switching to working on next bigger market, and next and next and so on.
The question I am asking is how big is the existing market today in which cryptocurrency is actively present, and how many markets can be reached in the future? You need to find out what market are they serving today, and what bigger markets can they serve next, and which even bigger market after that.
Take a Tesla which is nice illustrative example. What many people do not realize is that Tesla has been around for a 20 years now. Yet in 2015 they sold only 50k cars. In 2022 they passed the million sold cars. But it did not start as huge success. The engineering team first took the body of a Lotus and made prototype with improvised battery packs which was way better than anyone expected, and with a lots of batteries stacked together, you could drive a car around.
Tesla was 6 months old company when Elon invested and joined in board of directors, became CEO and took it to the next level, and the rest is history. Now when you would look as alien independent observer of human civilization, of all the cars on the roads, would that alien conclude that Tesla has hit mainstream adoption? Not even close.
It is certainly eating some niches in the car industry, they even created their own niche. The goal is to become first, but you can’t become first in already established areas. At least not soon, others will not give it to you, they will fight you. That is why it’s best to see what areas are underserved, and become best in that tiny market segment.
Tesla took real material percentage of luxury cars, but it is not even close to few % of cars on the road. But they are first in electric cars segment.
So once again, how Tesla gained adoption? First Tesla had this toy prototype, so called “proof of concept,” and there were few of them. Then Tesla made luxurious sports cars with premium price and there were thousands of them. It turned out that the market was really small, but it was totally underserved.
Now from this electric sports car they then went into an electric sedan that was also very expensive but less than sports car. It was a slightly larger market that was being underserved. There were tens of thousands of these.
Then they went to electric SUVs which was serving slightly bigger market. Again – bigger market, and lower price range… and now they went to even more mainstream car, the Tesla Model 3. It’s a much larger market and much lower price of car with unique benefits.
All this is explained in Tesla masterplan which Elon Musk released in 2006.
Next they will make really mainstream car for the first time and continue spreading to pickup trucks, large trucks, quads… in the future… and now if you realize that Tesla is actually energy company, it opens the door to many other existing and future markets that does not involve transportation of people, but big batteries for households with solar grids.
You have to understand that same way as Tesla took a long time to sequence the markets, and they still does not have mainstream car on roads, not to talk about the market share.
Every technology that’s going to be really adopted does the same thing. Because of research that needs to be done, the most successful breakthrough technologies take more than a decade to even start to ramp up towards mainstream adoption.
Ethereum started with platform for decentralized applications, and it may end up with being most valuable technology ever. Ethereum is eating contracts, and what is value of all contracts? It is a quarter quadrillion dollars. Can you imagine that amount of dollars? Tell me how you did it btw.
Ethereum can extend what contracts can do, because they are smart now, they can be even larger than existing market for contracts. That means that it can eat governments, because what is a government? It is a series of courts that enforces contracts. When you are born you have contract with the government, which is called a law.
Eventually, Ethereum has a potential to change a way how human society functions and how it runs. Some pretty crazy thoughts I know, but hey, that is potential, it does not mean that it will be fulfilled.
This is fundamentals
It is important here just to realize that these new technologies are not only eating the market, but they can grow the market, and they need to start with tiny little simple market.
That’s what I call fundamentals, ladies and gentlemen.
The fundamentals layer on top is that you can see how protocol is eventually going after important aspect of human nature. In order to serve and capture a large amount of value, it needs to be serving a very valuable market. The easiest way to figure out how big a market is, is to just google how big it is.