What We Can Learn from Failed Cryptocurrencies

Take a look at the top 200 cryptocurrencies from late 2017 and it’s a completely different landscape from today. While the top ten are all still alive and kicking (even though some have taken unceremonious drops in price), many of the biggest cryptos of 2017 have now fallen into relative obscurity.

Of the top 200 of December 17th, 2017, just 43 remain there today. Even more fun, have a look at some of the top 50 cryptos on that date:

Komodo? Augur? PIVX? TenX? So many consonants! So few use cases. And the further down the list you go, the more the cryptos are likely to fall off the list (even though the average return of smaller cryptos continues to trend upwards). Take a look at the graph below, which shows us that smaller cryptos are unsurprisingly more likely to fall off the map:

If we take a deep look into the top 200 from 2017, we can find five main categories of cryptos:

  1. Old cryptos that have continued to thrive (BTC, ETH)
  2. Old cryptos that have ‘held on’ (DASH, NANO)
  3. New cryptos that have had meteoric rises (SOL, AVAX, CRV)
  4. New cryptos that haven’t yet grabbed market share (most small caps)
  5. Old cryptos that have absolutely fallen off the map

Today, we’re looking at that last category, cryptos that have tanked, disappeared, rug pulled, or evolved into something else. Those will hold the lessons of the nightmare scenarios we’re trying to avoid.

I do want to say that holding indexes of cryptos for the long term (the top 200, for example) is not necessarily a bad investing decision (you can read exactly why not here). On average, the winners grow tremendously, canceling out your losses. Still, though, we’d like to avoid the duds. Let’s see if we can learn some lessons below:

The Promise: Bitconnect is perhaps the biggest rug pull of all time. With a peak price of $463/coin, the crypto-turned-meme promised ridiculous risk-free-yields (1% daily) with their trading bot program, which accepted Bitcoin, not Bitconnect. With an all-time-high in December 2017, it dropped to about $0.40 by March 11, 2019 when it was finally delisted from exchanges.

The Warning Signs: Warning signs were abundant for the nebulous cryptocurrency: there was no whitepaper, no public codebase, daily rewards for just signing up, and an ‘automatic trading bot’ that provided consistent 40% ‘riskless’ returns. It also was predominantly traded on its own platform-you couldn’t really move it around or buy it on other exchanges like you can with real cryptos.

The Result: Bitconnect is worthless now, after being sued by multiple countries and states. Several members of the team are in jail.

The Lesson: Understand the difference between legitimate (risky) crypto assets and fake Ponzi scams/schemes, and believe me, they still exist. To me, some of the characteristics of Bitconnect (especially its frequent litigation by state/national governments) seem to have commonalities with Tether ($USDT). Maybe avoid that too.

The Promise: Founding a Metaverse (you know, digital virtual reality world) startup these days can get you a $10 million pre-seed valuation and interest from some of the biggest VCs in the world. So what happened to the first one out there?

Metaverse ETP is testament to the fact that you can be working on a great idea but still end up with a dud. The crypto understood the need to create infrastructure that would usher in a new age of digital identities and collaboration, but ended up on a wild goose chase.

The Warning Signs: The below diagram is taken directly from Metaverse’s whitepaper:

Metaverse viewed the path to a digital world as linear, with consecutive steps necessary to break through to the other side. Thus, they put most of their eggs in the ‘digital identities’ basket, looking to create an avatar system blockchain-verifiable resumes, credit histories, anonymous identity verification.

But it turns out, we skipped most of that. The product Metaverse was selling just wasn’t really necessary to get directly to a world of decentralized projects and organizations with pseudonymous founders. On top of that, they were early. Sure there are problems associated with anonymous work and DAOs (check out Kleoverse), but those startups are just starting to raise seed rounds. Their product was needed after DAOs were adopted, not before.

The Result: Metaverse ETP is down an uncomfortable 96.01% to date, not particularly pleasant for investors or founders. The team is still active, although their roadmap hasn’t been updated or advanced since 2017. They still issue monthly reports and have an active Twitter. It’s not a ghost project, just one that has mostly fallen to the wayside.

The Lesson: An idea that’s ahead of its time can be worse off than an idea that’s late and has momentum in the market. Putting all of your eggs in a basket for a problem that doesn’t need solving is a recipe for disaster.

The Promise: DECENT is a Czechoslovakian blockchain company that entered the space early, launching their token all the way back in 2015. The premise? Figure out a way to democratize content creation. As intermediaries typically charge anywhere from 50% to 70% of artist revenue for distribution, their main product, DCORE worked to fix that, using crypto, somehow.

The main issue? Since 2017 we’ve seen tons of disruption in the content distribution space, although very little has been in crypto. Substack, Youtube, Patreon, have all blown up since 2015, each of them without the help of blockchain.

The Warning Signs: A cryptocurrency called ‘Decent?’ At least they’re not overpromising. In all seriousness, it’s a good case study on the fact that all businesses are not served best by cryptocurrency. Right now, cryptos are great for facilitating decentralized digital asset transfers, and that’s about it. They’re not structured for integration with mainstream payment systems, current intellectual property laws, or interaction with the physical world. Not everything needs crypto, at least not right now.

The Result: Decent traded at around $9 at its peak, while now the token has disappeared entirely. The last known price was $0.00779, which means it dropped a grand total of 99.8% from its ATH to its ultimate demise. The company appears to have transmuted into a blockchain consultancy, more or less, no doubt aided by filling up their coffers at a (one time) $500 million valuation.

The Lesson: Just because you can make a crypto company doesn’t mean you should make a crypto company.

The Promise: Wait, hasn’t ZCash exploded in price in the last couple of months? Well, yes. Privacy-focused cryptocurrency $ZEC has almost 3x’d in the last two months, showing remarkable downside resistance by continuing to pump in an otherwise frothy market.

But zoom out a bit further and you’ll see it traded below $20 a few years ago. And that’s down from a ridiculous all-time-high of $3,191. For a single token holder, that represents a negative 99.4% return. This token is the definition of why people prefer more stable assets over crypto.

The Warning Signs: Concerns around proof of work have been around since Bitcoin’s inception, but a bug that could’ve made the ‘fixed’ supply of ZCash into an infinite supply was really what drove the crash. It was corrected, but price never really recovered. Thus, it was bad code, not a bad concept or idea that drove ZCash into the ground.

The Result: While ZCash stagnated for years, interest has recently renewed in the project as it announced a switch to Proof of Stake, became governed by a decentralized foundation, and began to experience renewed development activity.

The Lessons: Just because a crypto gets destroyed in price doesn’t mean it’s beyond hope. Cryptos have tanked to rise again many times, and it will happen again. That still doesn’t mean you should be buying every microcap ever.

What We Can Learn

After looking into these failed cryptos, it’s interesting to see how much their declines varied. Obvious scams are one thing, but an idea that is too early to market? That probably just looked like the next greatest thing at the time. On top of that, we’ve got the cryptos that rise from the dead, spurred on by new interest.

Without directly talking with the teams, it’s a little tricky to have a perfect idea of what goes wrong. You can take your own conclusions from these blockchain failures, but I think the most important lesson is that each and every cryptocurrency is unique in its own way.

That seems like a cop-out, but in my experience, it’s true. Imagine trying to measure a DeFi token by the success of Bitcoin, or the success of Ethereum in terms of how many unbanked people it has been able to serve (gas fees make sure that’s not possible). Each crypto is attacking new and different markets or problems, and the biggest and best ones often create new markets from scratch.

My final opinion? All of this just goes to show that crypto assets beg to be researched. It’s fundamental to understand the concepts, network effects, and financials behind a cryptocurrency before investing.

No broad strokes ideas or opinions will stand up to an in-depth data-backed analysis. Each investment you look at requires intense rigor and investigation to determine the opportunity and upside available. FOMO is not a viable investment strategy.

In other words, make sure you do your research, or you might just end up down 99.993%.