The Real Value Potential of Cryptos

After the sharp decline in prices of cryptocurrencies to new record lows in 2018, it has become fashionable to proclaim “the end of the hype” or to consider it as “the largest bubble in human history”. Despite admittedly high levels of volatility of the cryptocurrencies, there have been numerous examples of various investments in the past that have been more blistering than crypto. Also, for a proper analysis of the movements of Cryptos and their real value potential, one has to understand the underlying processes in a historical context with the relevant protocols.

With the inception of the Internet in 1991, the internet was launched as the so-called Web 1.0. The information was provided in a read-only mode, while the communication took place via email. Everybody was able to access various information at relatively low cost. Examples of the relevant protocols were TCP, IMAP and HTTP. In the early 2000s, Web 2.0. followed which made read and write possible. Thus, the users could now interact with each other and create content on websites. The era of social media and e-commerce with Facebook, Twitter, Amazon & Co. had begun. 

However, within the protocol structures a trusting third party, the “host” of a network, is required in order to centrally store and manage the data. It serves as an intermediary that dictates (its own) rules, secures access to the user data and is able to defend its position against competitors. In fact, from these user data a value that can be monetized for the provider is created. XML is probably the best known protocol standard.

Now, the next wave, Web 3.0, is rolling in. It will provide the possibility to transfer values between the users (Peer-to Peer) in a trustworthy environment and without the need of a central authority. The instruments for these transactions are so called Tokens. As such, the values are created in token models at protocol level, as all network participants (users, miners, nodes. etc.) receive incentives to actively engage in the network, while at the same time new users pay for the use of specific services and rights with tokens.

As a consequence, a monetizable value will be created in the network and distributed between the users instead of being handed over to a centralized platform. Examples of such protocols are the currently discredited Bitcoin, Ethereum and others, the application of which has a high value potential. 

Of course, it might take quite some time for the real values of those cryptos to be detected, as we are facing a disruptive technology and need new business models, new regulative frameworks, and user acceptance. However, the development from Web 1.0 to Web 2.0 took also may years and we are far from the end of the crypto currencies. In fact, we are only at the beginning of a new era.