The End of Crypto Winter?

By Peter Johnson
5/6/2019

85 Theses for The Changing of the Seasons in Crypto-Land

It’s been a cold winter in crypto-land for the past year or so, but with bitcoin recently breaking back above $5,000, some folks think they are seeing the green shoots of spring. I think these folks are right…to some extent. I believe spring is coming, but it’s not coming to evenly to all parts of the land.

The euphoria of the 2017 crypto bull run ushered in a rush of activity in the space — some creating innovations that could change the world, and unfortunately, others sprinkling “blockchain” on everything and just trying to grab their piece of crypto riches in the frenzy. The cold of winter has separated out what is real…and what is not. This has led us to where we are today — on the verge of spring in some areas of crypto-land, while other areas are likely to remain in the deep freeze of winter (and a couple where spring will come, but need more time).

In this post, I visit 9 of the major areas of crypto-land, and across 85 theses, break down were they fall on the following spectrum:

A. Green Shoots — There are real green shoots in these areas, and spring is on its way.

  • Emerging Markets Uses
  • Investing & Trading
  • Stablecoins as a New Global Money Transfer Rail
  • Regulatory Compliance Solutions

B. Punxsutawney Phil (Sees His Shadow) — Hunker down for a longer winter…these areas need some more time before spring.

  • Decentralized Finance
  • Tokenization of Everything

C. Deep Freeze — These are going to remain in the deep freeze of winter for a while.

  • ICOs
  • Buying Coffee with Bitcoin
  • Enterprise Blockchains

(With a caveat to these broad categorizations that even in areas where there are green shoots there are also some frozen spots, and vice versa)




Before diving into these specific areas, my 2 core crypto theses:

1) The fundamental innovation of crypto* is that, for the first time ever, parties anywhere in the world can transfer value without the need for a trusted third party.

2) This is a once in a generation technological innovation which will change the way value is stored and transferred.

*I use the phrase “crypto” to mean the use of distributed consensus ledgers (blockchains) to transfer units of value recorded on these ledgers (BTC, ETH, etc.)


And now, on to the remaining 83…

Emerging Markets Uses — Green Shoots

3) Adoption of crypto in markets with hyper-inflation continues to gain very strong momentum…and is just getting started.

  • As shown in the below chart from Digital Assets Data, LocalBitcoins volumes in markets with low inflation (orange line) has largely followed price movements, while volumes in markets with high inflation (blue line) has been steadily growing, and is currently at all-time highs.
  • This is the true opportunity to use to fundamental innovation of crypto — as a value store and transfer mechanism where hyperinflation and distrusted governments have rendered fiat currencies unreliable to serve the core functions of money.

4) Using crypto as a store of value will come before use as a medium of exchange or unit of account.

  • Crypto’s use case in emerging markets is often individuals obtaining crypto to store value (via remittances, mining, payment for online work), and then converting to fiat to buy local goods. Crypto ATMs in these areas are not primarily used to buy crypto…they are used to sell crypto for local fiat in order to purchase goods.

5) Over time, I expect merchants in countries with rapidly depreciating fiat currencies to accept crypto (and even price in crypto), as they don’t want to be the bagholder stuck with the worthless local fiat currency.

6) Widespread adoption of crypto in these areas will be dependent on widespread internet access & mobile adoption, education, improving user interfaces, scaling to allow a high number of fast transactions (likely via layer 2 solutions such as Lightning), and decreased price volatility (or use of stablecoins).

7) Crypto payments to emerging markets could unlock significant value for the global economy and raise standards of livings in emerging markets.

8) Getting crypto in the hands of people in markets with hyper-inflation is a clear win-win for everyone. People in these areas need a better currency (and often need financial assistance), and the crypto community needs crypto to be actually be used in the world. Supporting initiatives like #AirDropVenezuela is a great way to work towards these goals.

9) Bitcoin (+ level 2 scaling) continues to be the most likely asset to fulfill these promises, but that is not a forgone conclusion.

  • This vision could also be fulfilled by stablecoins (and accelerate the dollarization of the world), or other crypto assets that are more natively scalable than bitcoin.

Investing & Trading — Green Shoots

10) The herd (institutional investors) is coming. However, they are arriving in a steady saunter and not the thundering stampede some expected.

  • Leading the herd were trading firms such as the Jump Trading Group and other leading market-makers and proprietary trading firms. More recently, some of the largest financial institutions in the world have rolled-out crypto investing products. During the last crypto boom, most financial institutions were caught flat-footed; the smart ones will be ready this time.
  • While volumes on spot crypto exchanges (largely retail investors) are way down from their peak, volumes of the most institutional product (CME futures), are reaching all-time highs, and are now surpassing volumes at the largest spot exchanges.
  • I am most encouraged by the recent surveys of 150 endowment funds in which 94% of them stated that they invested in crypto assets last year (Source), and of 441 institutional investors in which 47% viewed digital assets as having a place in their investment portfolios (Source).

11) The great infrastructure buildout is happening — We are currently experiencing an infrastructure build that will usher in the next wave of participants into this market.

  • Custody solutions are increasingly becoming regulated, insured, and trusted.
  • Professional trading tools are enabling traders to easily trade across venues and liquidity pools.
  • Back-office crypto accounting and administration tools have emerged to meet the needs of institutional investors.
  • Data providers are enabling investors to conduct investment analysis and make more informed trading decisions.
  • Banks are increasingly providing services to crypto companies, including real-time fiat settlement services.
  • A crypto borrowing market is emerging.

12) Despite this progress, the current market structure is capital inefficient and is likely to change.

  • For example, to trade across multiple exchanges, all exchanges need to be completely pre-funded with coins and/or fiat. This is not capital efficient nor how traditional markets operate.

13) Custody and settlement will increasingly be separated from exchanges.

  • Combination of exchange, settlement, and custody is unique to the crypto market. Separating these functions will be more capital efficient (e.g., allow holding assets with custodian and having buying power across exchanges, solving issue above), and safer (QuadrigaCX situation could not have happened if they were using external custodian. For that matter, neither could have Madoff…which led to some of the Qualified Custodian rules).

14) One, or a small number, of the largest custodians will establish themselves as the “DTCC of crypto”. They will hold a large portion of crypto assets, and transfers of these assets will increasingly be recorded in the records of these custodians, without the need to move assets out of cold storage.

15) “Prime Brokerage” services will continue to emerge — intermediaries who provide access to markets, leverage, ability to short-sell, etc.

16) Prime brokerage can be a capital-intensive service, and to be provided well at scale, will likely need to be provided by either startups raising very large amounts of funding, or larger financial institutions.

17) The largest and most trusted financial institutions will (eventually) come into the market, particularly in custody and prime brokerage roles.

  • Expect them to leverage their balance sheet and reputation with best-in-class technology (e.g., BitGo or Curv for private key security, Omniex for OMS/EMS). This will happen, but take longer than many people expect.

18) Crypto will have a dramatic impact on some traditional markets. The most significant impact will likely occur in FX, where the rise of stablecoins will also give rise to a new FX market, offering 24/7, instant, low-cost conversation between currencies.

19) ETF’s will be approved (at some point). When a Bitcoin ETF is approved is highly uncertain, but when it is, will signal a titanic shift in the market as investors will be able to access crypto in a product structure they are very familiar with, and is offered through all major brokerage platforms and advisers.

20) Tax loss harvesting will become much more common in crypto. This is currently a big missed opportunity for investors, and automated tools will make this commonplace (much like robo-advisors have in traditional markets).

Stablecoins as a New Global Money Transfer Rail — Green Shoots

21) Stablecoins are likely to emerging as a new global money transfer rail, although they face potential competition from new centralized payments systems.

22) In the near-term, fiat-backed stablecoins (fiat held in bank accounts backing coins) are more promising than truly decentralized stablecoins (such as Maker Dai).

23) Maker Dai is a complex, but brilliant and beautiful system, however…

24) It’s also an unproven R&D project at this point (as are all other fully decentralized stablecoins), as shown by recent difficulties maintaining its peg and internal turmoil. Companies and individuals are not going to trust truly large sums of money in this sort of system in the near-term.

25) The value in fiat-backed stablecoin systems does not come from them fully using the fundamental innovation of crypto (since there is a trusted third party involved in holding the fiat), but instead from the fact that they allow the creation of a new global money transfer rail that is completely accessible (to anyone with a crypto wallet), and interoperable across currencies (users can directly access and exchange any fiat currency).

26) A fiat-backed stablecoin system can also be more efficient (fast, free, 24/7) than current money transfer rails (but a better centralized system could also hypothetically offer these efficiency gains).

27) In assessing the potential of stablecoins as a new global money transfer rail, I look at A) the characteristics of an ideal global money transfer rail, and B) the various ways this new money transfer rail could be provided (both centralized and decentralized).

28) The ideal new global money transfer rail would offer:

  • Free (or nearly free), instant value transfer, with 24/7 availability
  • Denomination in multiple fiat units (the units the world currently uses)
  • Ability to send to any counterparty / anyone
  • Ability to swap assets with counterparties where both accounts are simultaneously updated (atomic swaps in crypto parlance)

29) There are several parties that could provide this solution, and they could offer it in a centralized or decentralized manner. The candidates to offer this (from least likely to most likely) are central banks, commercial banks, and large global tech / crypto companies.

30) Coordinated central banks could hypothetically provide these new rails, but are very unlikely to do so.

  • Central banks are unlikely to start directly issuing crypto assets (particularly in a worldwide coordinated way), or directly onboarding users and keeping records of value held by individuals and institutions.

31) Large commercial banks are also candidates to provide this, but don’t provide a complete solution.

  • This works within a single country, with a limited group of participants (e.g., effectively the Silvergate Exchange Network or Signature Bank’s offering).
  • This solution breaks down in providing universal, global money transfer rails largely because a single bank (or even a consortium of banks) are unlikely to directly onboard the majority of potential users.

32) Large, global consumer technology and crypto companies may be the best positioned to provide new global money transfer rails (with records either kept on centralized databases, or a distributed consensus ledger (“DCL”)).

  • The largest global tech companies have already onboarded a large number of users, have the appetite to onboard much more of the world, and have the technology to issue assets onto a DCL (or manage the balances of billions of users internally if not using a DCL).
  • These companies could offer a new global money transfer rail by working with banking partners in various countries to create/redeem stablecoins (or holding omnibus accounts with local currency balances if running a closed system not on a DCL).
  • The primary challenge for this system would be that it would bring significant regulatory burdens onto these companies (financial services regulation in each jurisdiction, including money transfer laws, AML/KYC, etc.).

33) The hurdle of one company meeting worldwide financial regulations can be eased in a system in which there are different issuers of different fiat-backed stablecoins in different countries (must be DCL / decentralized system).

34) It seems that a new global money transfer rail utilizing stablecoins will emerge, in an elegant way in which:

  • Trusted entities in each country hold fiat balances in bank accounts in each country
  • These entities create/redeem fiat denominated and backed coins on a distributed consensus ledger
  • Once issued, coins are freely movable between anyone with a crypto wallet
  • Individual user onboarding is decentralized to crypto wallet providers & exchanges, who follow regulations in their jurisdictions
  • Coin issuers only need to onboard parties who create/redeem

35) In this multi-issuer scenario, centralizing the storage of coins with one custodian still offers a marginal benefit for use cases where instant transfers are required (since on-chain transactions are not completely instantaneous).

36) Even though I envision various stablecoin issuers in different countries, I believe there will only be a small number (1–2) dominant stablecoin winners for each currency.

  • The market will consolidate to 1 (or maybe 2) universally accepted winners in each currency, with other stablecoins for that currency dying off, as there is little to no marginal benefit of having multiple stablecoins for one currency.

Regulatory Compliance Solutions — Green Shoots

37) Crypto regulation is still quite unclear, but regulatory certainty is continuing to emerge as various regulators around the world provide more guidance.

38) I am hopeful that smart regulation will clean up much of the bad behavior in crypto-land and fortify where crypto interacts with the traditional financial system, while allowing innovation in the ecosystem to continue to develop.

39) Compliance solutions will be one of the biggest opportunities for startups (and existing regulatory compliance companies) in the coming years.

40) Blockchain analysis to determine where crypto assets are being used by “bad actors” is inevitable…and that is ok.

41) If my thesis for the rise of stablecoins is right, this will be particularly relevant for these coins, as the redeem-ability of specific coins may be suspended if they are identified to be interacting with known bad actors.

42) I think this could be a good system to allow widespread use of stablecoins freely around the world, while still protecting the financial system from misuse (as it puts the regulatory hurdles primarily around the create/redeem process, and not on every transaction).

43) There will be a correlation between how tightly regulated crypto assets are and their use by regulated institutions.

44) Fiat-backed stablecoins will be the most tightly regulated, and most used by regulated institutions. Anonymous crypto assets (ZCash, Monero, etc.) are by design the most difficult to regulate and will be the least used by regulated institutions. Bitcoin will be in the middle. There will be options for everyone on the regulated / censorship-resistant spectrum.

Decentralized Finance — Punxsutawney Phil

45) Much of the most innovative work in crypto is being done around decentralized finance (DeFi) — i.e., utilizing smart contracts to offer trustless financial services (exchange, lending, insurance, etc.).

46) In the near-term, DeFi projects will largely continue to be fascinating research projects…widespread, real-world adoption will be slow to materialize.

47) Outside of the crypto community, no one generally cares if a solution is centralized or decentralized. They only care if the solution solves their problems better than current solutions.

48) Currently, there are few situations were DeFi solutions are solving a problem better than a centralized solution. Additionally, user interfaces for DeFi solutions are generally much worse than their centralized counterparts…which creates a huge barrier to DeFi adoption.

49) The use case for decentralized exchanges is developed markets is unclear, particularly as centralized exchanges become more trustworthy (e.g., by separating custody from the exchange, and/or providing proof of reserves).

50) Where most DeFi solutions (including decentralized exchanges) have their most clear potential value proposition is in emerging markets.

51) Cryptocurrencies need to gain adoption for their basic currency uses (store of value, medium of exchange) before more complex decentralized uses (e.g., decentralized lending) will take hold at scale.

52) The decentralized application I expect to get the most traction in the near-term is decentralized lotteries.

53) Within the next few years, there will be global, billion-dollar lotteries running on smart contracts.

54) These lotteries will be unstoppable (at the smart contract level), and governments will need to react to these developments. (e.g., by looking to restrict access to the interfaces that interact with the contracts?)

Tokenization of Everything — Punxsutawney Phil

55) With the ICO market dead (more on that later), interest has turned to the tokenization of more traditional assets. (stocks, real estate, etc.)

  • It’s actually more accurate to say interest has turned back to this…remember Colored Coins?

56) The general pitch for tokenization of everything is that it allows smaller portions of assets to be traded (e.g., a fraction of a property), provides greater liquidity for these assets, and enables the democratization of finance by allowing individuals to invest in more assets.

57) To assess these claims, we need to look at what DCL’s are actually enabling that was not previously possible by keeping ownership records on a central database.

  • Dividing assets into smaller portions? — Could definitely do this on a database.
  • Providing greater liquidity? — Unclear how changing how the ownership records are kept increases liquidity. The liquidity issues for these assets stem from that facts that there are a very limited number of buyers and sellers for small portions of real estate, tiny companies, etc., and that these markets are not attractive markets for institutional traders and market makers due to low natural volumes, and difficulty intrinsically pricing the assets.
  • Democratizing access? — Non-tokenized crowdfunding platforms can provide access to these types of assets without a token.

58) For most assets, it does not seem that tokenization is an inherently better way to track ownership records (vs. a centralized database).

59) An argument could be made that crypto exchanges have already onboarded very large numbers of users, and thus tokenizing new assets is the way to get these assets in front of these users (i.e., it is a distribution advantage, not a technology advantage).

  • It could then follow that getting tokenized assets on crypto platforms with many users could provide more trading activity in these assets, and thus more liquidity….but this has yet to be proven out.

60) I am hopeful that longer-term we will get to the tokenization of more assets and financial instruments, and that value of this model will come from not only the potential distribution advantage, but also from technological benefits decentralizing the tracking of ownership.

ICOs — Deep Freeze

61) The ICO market is dead.

62) In many (most?) ICOs, the token was completely unnecessary.

63) Most ICO’d coins have no value capture mechanism (other than a weak hope that they would have “utility” within a closed system).

64) Much of what was issued in 2017/2018 was nothing more than commemorative coins — the main utility of which will be to give us something to look at and remember the crazy times we had during this period.

65) IEOs are renamed ICOs.

66) Many companies that did ICOs are realizing that their coins are not needed, and are trying to gracefully pivot their business models away from them.

67) Turns out the “business model” of 1) developing open source software, 2) adding a token, 3) profit …was largely a fallacy.

68) I don’t buy The Fat Protocols Thesis. More value will accrue at the application layer than the protocol layer.

69) Luckily, there are proven models for monetizing open source software (e.g., Red Hat) — providing services, hosting, and building enterprise versions. Expect to see a lot more of this going forward.

70) I DO expect to see new coins come on to the market that are valuable. These will either be new currencies (to challenge BTC, ETH, LTC, XMR, etc.), or that have legitimate value capture mechanisms (staking, rights to cash flows, etc.).

Buying Coffee with Bitcoin — Deep Freeze

71) The dream of using bitcoin for purchases in developed markets (“buying coffee with bitcoin”) will continue to be just a dream in the near-future.

72) Merchant payment systems in developed markets work quite well.

73) There is little customer incentive to pay for items with BTC (or any digital asset) — using credit/debit cards is easy, and rewards points are great.

74) Merchants have some incentive to accept crypto since interchange fees are high, but they do not want to receive BTC (or any digital asset).

75) The best chance for using crypto in developed markets is using stablecoins + customer incentives provided by merchants.

76) However, the marginal benefit of this to merchants, weighed against the challenges of changing their payment processes, and incentivizing consumers enough to change their payment behavior, means this use case is likely going to remain in the cold of winter for a while.

Enterprise Blockchain — Deep Freeze

77) Most “enterprise blockchain” solutions make zero use of the fundamental innovation of crypto (transferring value without the need for a trusted third party), and are better served by centralized databases.

78) Putting tomatoes (and other various fruits and vegetables) “on the blockchain” is probably the most egregious example of something that does not need a blockchain.

79) If you can replace the word “blockchain” with “database”, use a database.

80) As the head of blockchain for a major consulting firm told me, “most companies are realizing they don’t need a blockchain, but they are using this opportunity to modernize and digitize their business.”

81) Even in the dark deep freeze of the enterprise blockchain winter, there are a few companies that are utilizing crypto’s data anonymization and value exchange futures to disintermediate middlemen and create significant business value. There will be innovative “blockchain inspired” concepts that emerge from all of the enterprise blockchain work…and even some enterprises actually using real blockchains.

In Summary

82) Spring is coming to crypto-land. It may not be imminent, but it is coming.

83) I expect spring to come first in the areas of Emerging Markets Usage, Investing & Trading, Stablecoins as New Global Money Transfer Rails, and Regulatory Compliance Solutions.

84) Decentralized Finance and The Tokenization of Everything will continue to develop in hibernation for a while.

85) ICOs, Buying Coffee with Bitcoin (developed market merchant payments), and Enterprise Blockchains will remain in the deep freeze of winter.

Credit goes to Ryan Selkis and Arjun Balaji for their much more eloquent lists of crypto theses which inspired this one.

If you are working on something interesting in the space, or just want to tell me how wrong I am about these theses, send me a DM @TheChicagoVC.



Peter Johnson is a Principal at Jump Capital, where he leads their investments in the fintech and crypto sectors. Since joining Jump Capital in 2013 as their first employee, he has invested in 50+ companies, including many leading crypto companies.

Jump Capital is a venture capital firm specializing in series A/B and growth stage investments. Jump invests in data-driven companies across the fintech, IT infrastructure, enterprise SaaS, and digital media sectors. Jump Capital is also affiliated with the Jump Trading Group, one of the largest proprietary trading firms in the traditional and crypto markets.

The opinions expressed herein are my own, and do not represent the opinions or views of Jump Capital or the Jump Trading Group or its members.


By Peter Johnson
5/6/2019

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