Why isn’t the impact of smart money on the original promise of cryptocurrencies being discussed more?

Ignoring the original utility-driven ideas introduced in the early papers on digital cash became the new normal once adopters encountered cryptocurrency price tickers. Is the new price ticker a sign of innovation?

There is a serious contradiction when thinking about inventions and new things. Culture influences technology, but technology itself influences culture. This also applies to distributed ledger technology (DLT). However, the cryptocurrency case is more interesting than other innovations because it is not currently used in the way originally proposed by its inventors.

Some might argue that the way cryptocurrencies are currently interpreted (mostly as an investment rather than a unit of exchange) is doing more harm than good. Smart money can help facilitate these potentially malicious use cases for cryptocurrencies, but the main question is why?

smart money

Smart money refers to financial organizations or individuals with significant resources, expertise and capital. Specifically, smart money is the money that flows in and out of the wallets of central banks, funds, venture firms, and even individual investors.

This kind of capital is essential to any new technology debate, regardless of industry or surrounding market, and the phenomenon has manifested itself in a variety of economic climates, from JP Morgan, which funded Thomas Edison’s inventions, to the venture capital firms that drove the Internet startup bubble of 1995-2000.

The growth of the cryptocurrency venture capital market in terms of number of transactions and amount invested.Source: Galaxy Research

There are other issues that inventors and builders face when there is a lot of investor involvement, but the main concern is that smart money utility is a limiting factor and the lack of discussion on this in the DLT space.

Common economic flaws still exist in cryptocurrency markets

The problem of cryptocurrency adoption may not be as bad as it seems, as only a small, close-knit community is paving the way for more compelling use cases and mainstream cryptocurrency adoption.

This may force the creation of unproductive markets in which individual and institutional investors infer intrinsic value from scarcity and thin air, and the utilitarian side of the new system can only be seen by underdog pioneers who were less influential at the time. Blockchain technology operates in a decentralized manner through the interaction of peer-to-peer nodes, but even in the early days of cryptocurrency, when whales were just emerging, potential problems such as wealth concentration and purchasable network control began to emerge.

Additionally, the nature of the cryptocurrency ecosystem, token design, fiat currency relationships, and lack of regulation have made market manipulation easier and more attractive to malicious actors. The zero-regulation part was attractive not only to retailers and criminals, but also to financial institutions.

The Wall Street Journal reported that a group of online traders congregating on messaging servers to collaborate on a pump-and-dump scheme manipulated nearly $1 billion in 2018 alone, which would be much harder to achieve in traditional markets.

Why was Bitcoin invented in the first place?

When it comes to cryptocurrency use cases, token-as-investment functionality has become so mainstream that we rarely think of Bitcoin (BTC) or its alternatives as tools for exploring digital cash and decentralized systems to advance our daily lives.

The 2008 global financial crisis and several other periods in economic history were driven largely by financial influencers whose goals were not necessarily related to those of the average market participant. The idea of ​​decentralization has been considered a potential solution to the problem of market control and influence. However, as mentioned earlier, his DLT design today still cannot protect the surrounding market from manipulation.

But the important part is that just because smart money’s involvement continues to grow doesn’t mean technologies like blockchain will stagnate. Smart money continues to push the idea that cryptocurrencies are the best investments, usually due to limited supply or simply virality.

Growth without mainstream adoption

Smart money puts crypto in the public eye by investing in tokens and start-ups, bringing mainstream attention to the sector, but the downside is that new minted crypto enthusiasts enter this world with the idea of ​​crypto as an investment.

They may then refer their friends to the cryptocurrency as a “buying opportunity” while still having financial gain. This can form a cycle that vaguely resembles a dreaded pyramid scheme, MLM, or pump-and-dump, without the participants even realizing it.

Pump and dump method. Source: LivingFromTrading.com

Had early crypto adopters focused on implementing the ideas explored in the now-famous Bitcoin white paper instead of seeing crypto as a foreign exchange market, today’s crypto use cases might be very different.

An ironic part of blockchain history is that while criminals “pioneered” real digital cash transactions on the dark web, the rest of the world traded, kept buying, or simply forgot about cryptocurrencies until they became big.

final thoughts

It is difficult to say whether there is a solution to this cryptocurrency abuse. Just as it is difficult to convince traditional organizations and governments to adopt cryptocurrencies without the promise of financial benefits, it will be difficult to effectively encourage institutions to pay attention to start-ups building scalable DLT systems in the real world.

However, in recent years, the inventors and builders of the aforementioned underdogs who are working on decentralized file storage, off-chain and on-chain data, transaction scaling, etc. should be greatly appreciated and recognized and introduce smart money as often as possible. A prescription like this could help users dispel the notion that cryptocurrencies are just an investment.