Meltem Demirors: Psychology is the Main Challenge for Crypto Adoption
“Long term, the biggest adoption challenges remain psychological,” Meltem Demirors, a cryptocurrency investor, Chief Strategy Officer at CoinShares, a crypto focused investment company, told Cryptonews.com.
“People will tell you it's infrastructure, custody, trading venues, indexation, and a number of other market design problems. I fundamentally disagree,” she added.
In this exclusive interview, Demirors who has a unique blend of experience in both legacy & blockchain-based finance and cryptocurrencies shares her thoughts on why venture capital (VC) is dead, market liquidity and what challenges security tokens and initial coin offerings (ICOs) face.
Read the whole interview below.
Will we see a widespread shift toward digital currencies?
Digital currencies, or the innovation of how sound money is created, is an innovation whose significance most of the world still hasn’t fully grasped. I continue to believe digital currencies will speed the evolution from physical economies defined by nation-states towards digital and virtual economies defined by shared sets of principles and beliefs.
The vision of digital assets native to systems & networks, i.e., tokens is an appealing one, but one that’s been implemented poorly in most cases through, appallingly bad incentive design via ICOs.
Do you have any concerns?
I wish more projects would question the design of digital assets instead of blindly repeating the same copy-paste token formula. I don’t see a world where users or developers will adopt a new system when VCs and wealthy investors own 80% or more of the resources in that system.
What do you expect to happen in the security tokens field in 2019?
Security tokens, in the form the market is currently talking about, present only marginal, incremental innovation in my opinion. There is this (pervasive) erroneous belief in the crypto ecosystem that creating supply will lead to a rise in demand. Tokenizing a bunch of assets via securitization isn’t going to suddenly create a steep function increase in demand for these assets. We will see many security tokens launch to great acclaim, but few will achieve the liquidity and transferability hoped for. Financial markets are some of the most regulated markets in the world, and no amount of tokens will change regulation overnight.
Liquidity remains one of the biggest roadblocks to widespread adoption of security tokens - how can this be tackled?
Liquidity is a poorly understood concept. Most people think liquidity means something is readily salable or marketable. According to Investopedia, liquidity is defined as the degree to which an asset or security can be bought or sold in the market without affecting the asset’s price. Liquidity is therefore a function of supply and demand for security tokens, as well as a function of investor confidence, market concentration, and market psychology. Untangling that - I think security tokens will continue to struggle with liquidity just as ICOs have. When a dozen investors own 20%-30% of the supply and share similar market psychologies, the market will continue to be volatile and liquidity will continue to be elusive.
This is the problem of coupling technology with finance - an investor’s mentality or psychology is notoriously irrational. You can engineer the most logical asset or market or system - but it all breaks down when human psychology gets involved, leaving engineers baffled when technical design breaks down at a core level. Right now, the 'shitcoin waterfall,' i.e. traders and funds moving to dump coins the fastest once there’s tradability, is symptomatic of the lack of long term conviction in most of these assets - regardless of whether they’re digital currencies, tokens, or securities.
Long term, the biggest adoption challenges remain psychological. People will tell you its infrastructure, custody, trading venues, indexation, and a number of other market design problems. I fundamentally disagree. We need confident investors who have long term conviction and a market sufficiently robust and diversified to endure lapses of conviction or faith. Until then, any sort of movement in the market will inevitably move price - and therefore, limit liquidity.
You’ve previously said venture capital is dead. How is the funding landscape changing?
In my view, there are really only a small handful of VCs, say 5%, that are actually “good” at what they do. Objectively, it’s difficult to measure performance because of the timing mismatch between when an investor writes a check and when a company has a material liquidity event. The fundamental challenge with VC is a challenge similar to that faced by ICOs - incentives. The power dynamic between investors and entrepreneurs has long been a strange one - as evidenced by recent events including rampant sexual harassment, fraud, and abuse revealed over the last year and continuing to come to light. ICOs are likely not the best funding mechanism, but they have helped founders understand that there is now an alternative option. Venture as a mechanism hasn’t seen much innovation since its beginnings in Silicon Valley. The world is now asking - what if we changed the model for capital formation?
Can you compare how the crowdfunding model differs from ICOs?
Crowdfunding didn’t work, aggregation and curation through platforms like AngelList was marginally successful - but ICOs opened up a whole new frontier. Founders now have choice. Founders have found a new medium for experimentation. You can now fundraise from a larger group of investors who are more ideologically aligned with you. Can you start to “punish” bad investors? I’m working with one of my portfolio companies on this concept - a clawback / buyback of equity from certain investors. Re-balancing the power dynamic between those with capital (VCs) and those with ideas (entrepreneurs) and everyone in between is much needed - and while there’s still much work to do, blockchain technology as a fundraising medium is presenting a compelling and cogent alternative.
I spent three years building the investment of “post-investment portfolio management” at Digital Currency Group, and the hundreds of crypto founders I worked with there and now at my own firm will (hopefully) can attest to the importance of having a post-investment strategy. I am excited to see the rise of more investment firms that incorporate this practice – what happens once a check gets written – because arguably that’s the hardest part of being an investor and where projects and companies need the most help. For too long, too many investors have gotten a free ride off other investors who are willing to do the hard work to help companies grow. No more!
As the crypto landscape evolves, what is your vision for CoinShares?
CoinShares has been a leader in bringing digital assets to market through new and unique structures. Our history is one of working through challenges to bring professional products to market. While CoinShares’ core business has historically been asset management, I am excited to play a pivotal role in shaping our future to play a more material role in networks and markets - not just as an asset manager but as an advisor, partner, and category creator when it comes to financial products and services for retail and institutional investors as well as crypto firms.