An Observation on Crypto Cycles: Is there still a Future for the Token Economy after Entering the New Cycle, Part 1

We review the crypto market over the past 6 months and analyzed the alteration of the market sentiment from optimism to anxiety by comparing the recent 2 cycles.

Last Cycle of the Market

In the previous cycle of Bitcoin’s development (2014–2018), there were a lot of new things and transformations that emerged in the crypto market. In this process, the following ideas left a deep impression in my mind:

1. The development of blockchain is indicated by the increase in Bitcoin’s price.
2. The token economy is more important than Bitcoin, which was especially apparent in the last cycle as reflected in the fact that the market was mostly led by Ethereum rather than Bitcoin.
3. Bitcoin is merely the starting point of the blockchain revolution. It is thought by many to be the first application of blockchain technology, and there will be a variety of applications in the future.

[caption id="attachment_14663" align="aligncenter" width="589"] Typical Blockchain Applications, Grant Thornton Malta[/caption]

4. The BTC Dominance Index will continue to decline. The value dropped from the last cycle of 90% to 40% and continued to decline at the end of 2018. It was once predicted to drop to 10% in this cycle.
5. Though the market is still full of Ponzi schemes and bubbles, the future will be brighter.

Though there are various Black Swan Events in the market, the industry as a whole is getting better. Further, I think the bear run in 2018 is still better than the market in 2017. The market, on the whole, is becoming more and more rational.

Market Review for the Past 6 Months

However, the development of the token market in the first half of the year is still far from what I had expected.

1. Compared with the previous cycle, the development of blockchain is slow and lagging behind.
2. Indicated by the price change, Bitcoin is more popular than the token economy. When it comes to the discussion on the token economy, Bitcoin will always be one of the main topics. In the past year, only a few tokens in the market surpassed Bitcoin, in terms of the percentage increase in price.
3. In addition to Bitcoin and tokens issued by exchanges, the value of most tokens is rarely recognized by the public. This is also closely related to the previous cycle. In the long run, we are more concerned about Bitcoin or other objects that have cash flow, such as the exchange tokens represented by BNB.

[caption id="attachment_14664" align="aligncenter" width="1120"] Binance Chain, BTCManager[/caption] 4. The market is still full of Ponzi schemes, which are becoming more and more blatant. Some of the scams today can easily acquire billions of funds in a few months. 5. The BTC Dominance Index is rising constantly and has reached 65% now. [caption id="attachment_14666" align="aligncenter" width="718"] Growing Bitcoin Dominance, CoinTelegraph[/caption] In the last cycle, since the emergence of various altcoins, the BTC Dominance Index slipped rapidly and took a long time to return to the original level. However, in this cycle, the BTC Dominance Index easily rebounded to 60%, and continue to climb even higher.

What’s the Problem?

Where is the value of the tokens and will they have a future? This is a serious topic because I believe that all of you are confident in the future and expect to participate in this event. In fact, at the beginning of the year, most blockchain practitioners had already prepared to go through the bear market for the entire of 2019. However, after the first half of the year, the rising Bitcoin prices sent the signal that the bear market is ending soon; while the other tokens continue to struggle. [caption id="attachment_14667" align="aligncenter" width="800"] Rising Bitcoin Prices, CoinDesk Markets[/caption] Such a strong contrast makes me confused that I cannot stop thinking about it in recent months. What is wrong with the market? Or is it that the majority of the people in the blockchain industry has wrongly predicted? We know that the market is always right, so it must be blamed on us, the industry practitioners. To find out the problems, I think it is time to learn about this market all over again, realizing what the difference is from the former practice.

Cycle: The Pendulum of the Economy

The picture above shows a typical pendulum theory. We can imagine that the price of a certain token in the market swings back and forth like the pendulum, and rarely stays in the hub of value. Further, physics shows us that the pendulum swings at the fastest speed in the hub area. Many people will use this picture to explain finance and economy, which eventually concludes with the keyword “cycle”. Although everyone knows the cycle, I did not think the cycle would bring such obvious fluctuations in the crypto market this year. However, my biggest question this year comes from the cycle. In order to explain more reasonably about what happened in the first half of 2019, let us explore beyond the crypto world to see how the pendulum of the global economy swung.

2019: Paradigm Shift Brought by Anxiety

[caption id="attachment_14669" align="aligncenter" width="589"] Comments of Min Zhu who participated in the 2019 Winter Davos[/caption] As a veteran Davos attendee, Min Zhu mentioned in his writings that unlike the optimistic atmosphere in 2018, almost everyone present was anxious this time. Further, Ray Dalio, the founder of Bridgewater Associates and one of the world’s most influential KOLs in the financial industry, said, “Let’s pray for peace”, which also sends the message of anxiety to the audience. The Davos Forum is the world’s top financial and economic forum, which, however, has rendered an atmosphere of anxiety at the beginning of the year to the economists, institutional leaders, and even policymakers. Yet, such uneasiness will result in a rise in Bitcoin’s price in the following 6 months. [caption id="attachment_14670" align="aligncenter" width="744"] Ray Dalio’s Paradigm Shifts[/caption] Ray Dalio warned again last month that Gold will be the best investment option for the next paradigm shift. If you always invest according to technical analysis, it is highly possible to be eliminated during the paradigm shift of the market. And one of the classical paradigm shifts is the breakthrough of Bitcoin’s price above $6,000. Almost everyone had thought that $6000 is a strong resistance price point. However, the paradigm shift resulted in a breakthrough happening. In this year’s paradigm shift, we found that Bitcoin is a great asset that many people would hold, this is evident as some big institutions and even countries have started to buy Bitcoins this year. [caption id="attachment_14671" align="aligncenter" width="745"] Wall Street, Bitcoin Exchange Guide[/caption] It means that institutional investors might choose to withdraw their funds from stocks and equities. During the swinging of the pendulum, people often invest in stocks or commodities like real estate when the economy is good. However, when the market turns bad, they may choose to hold cash first. Once the economy becomes worse to a certain extent, such as when an economic or political crisis emerge, they will choose to store gold directly instead of having cash. So, what Ray Dalio wants to tell us is that gold is moving to the right side in a state of being neglected or even feared by everyone, while other assets are moving to the left. Surely, the pendulum will swing back, but the question is how long will that take? For now, the entire market is clearly moving to the right, which means that risk aversion is still on the rise.