Do crypto prices actually matter?

The events of 2022 have called into question whether crypto will (or should) survive. Before FTX collapsed in November, there was the meltdown of stablecoin Terra and its companion coin LUNA, as well as the related implosions of cryptolender Celsius, cryptobroker Voyager Digital and hedge fund Three Arrows Capital, to name a few of the most dramatic failures. At the end of the year, there were questions about FTX’s former rival Binance, which has been confronted with large customer withdrawals and criminal investigations regarding compliance practices. Just 12 months ago, many of these companies were hailed as examples of how vision, bold thinking and audacity could build multibillion-dollar empires overnight. Now they offer very different lessons.

After each high-profile crypto meltdown, there have been renewed calls for greater oversight of the space. The idea is that if we regulated crypto players like traditional financial institutions, they would start behaving like one. But a regulatory framework tailor-made for the technology would only tackle part of the problem. It would definitely improve consumer protection and market integrity. However, that would not change the underlying incentives in the space and stop some of the reckless and fraudulent behavior it has attracted to date. For the crypto industry to have a positive impact on society, we must first overhaul how it measures progress – and success.

From the beginning, crypto participants have been obsessed with the price, market capitalization and trading volume of competing coins. These metrics have distorted the incentives of well-intentioned crypto-entrepreneurs, making it easier for bad actors to interfere, attract capital, and generate hype around their scams. For crypto to truly become mainstream, the industry needs to stop blindly relying on these convenience metrics and pay more attention to dimensions that closely track progress relative to actual consumer and business needs.

The problem with crypto prices and related metrics

It all started in the early 2010s with the first alternative coins (or “altcoins”) introduced to compete with Bitcoin, and with an abundance of what appeared to be unbiased, market-driven metrics. Because cryptocurrencies rely on public ledgers, a wealth of metrics including price and market capitalization were readily available from the start. The resulting sense of transparency, and the deceptive similarity between cryptocurrencies and public stocks, legitimized these metrics far beyond their utility. Also, since crypto markets lack many of the safeguards that have been introduced over decades of trial and error in traditional finance, it is all too easy for bad actors to game and exploit these metrics.

The result of this is an environment where it is possible to launch a new crypto token and quickly appear – at least on paper – to have created a network worth billions of dollars. In truth, these skyrocketing valuations are produced by limiting the supply of coins available for trading, and quickly plummet when the hype machine that sustains them slows down. But when faced with the alternative, it’s very hard for entrepreneurs and investors to resist the temptation to use these now standard values ​​as evidence of positive momentum. It’s human nature to believe that the price of your token, no matter how inflated it may be, accurately reflects the potential of what you’re building.

By giving nascent crypto ventures an aura of scale and competitive moat, these metrics also make it easier to attract developers, secure partners, and raise more capital—creating a vicious cycle where founders have no choice but to “fake it ’til they can do it.” It’s as if the founders of today’s tech giants had traded their stocks in real time from the moment they announced a beta product instead of when they went public. Amidst the investment frenzy, uncertainty and hype, it’s easy to get distracted by numbers – no matter how untethered they are from reality.

This premature financialization of the crypto innovation process has a distorting effect. The incentives it creates dictate the types of problems founders prioritize, how the market rewards their actions, and the long-term sustainability of what they build. Entrepreneurs’ attention shifts away from more challenging, uncertain dimensions of technical progress, and crypto tokens and their prices essentially become the “product”. As a result, real progress stagnates.

We have seen where this way of doing business and innovation leads. Pump-and-dump schemes, exit scams and good old fashioned grift hide well and thrive among legitimate projects when a project’s market value and this “number goes up” – a meme that has become somewhat of a religious issue within parts of crypto . – is all that matters.

Leaves poor crypto calculations

Ironically, in a setting where everything can be easily measured, there is a great need for better calculations. After all, measurement is a way of assigning value – it reflects the guiding philosophy behind organizations, markets and systems. To stop being led astray, crypto entrepreneurs and investors need to rethink how they measure progress.

Consider the profound ways that metrics impact innovation.

Every company needs to identify key metrics to align its teams, quantify progress with, and ultimately compete on. Examples range from transistor density at Intel following Moore’s prediction to the race for megapixels in digital cameras, progression-free survival in oncology, net promoter scores in customer loyalty and more. By channeling attention to a small number of dimensions, metrics force companies to ruthlessly prioritize resources and commit to making progress in a particular direction.

This is especially valuable when dealing with unstructured problems that have a lot of uncertainty about the best way forward – exactly the kind of problems that are abundant in nascent industries like crypto.

Once established, metrics can outlast their practical utility: While James Watt developed horsepower at a time when a comparison between steam engines and horse-drawn transportation was important, metrics were transferred to trains, boats, and automobile engines. Centuries later, while it is uninformative for electric vehicles compared to alternative calculations, it remains an undisputed industry standard.

The same kind of metric inertia is suffocating crypto and has caused serious damage as attention, talent and dollars have chased a handful of convenient but flawed metrics. While coin prices and value flowing through a network can become reliable indicators of quality as crypto markets mature, today – whether intentionally or not – they are far too easy to game. Extreme examples of this are the Terra stablecoin and the FTT token from FTX, both of which created an illusion of value through aggressive marketing and subsidized growth, only to later crash and burn into a death spiral when their flawed finances came under stress. In what are surprisingly transparent versions of a Ponzi scheme, investors blindly rely on market capitalization metrics as hard evidence of actual value.

Unfortunately, honest entrepreneurs can’t completely escape the tyranny of these metrics either, whether it’s because their venture capitalists (VCs) have pressured them to include a token and drive up the price through incentive designs — helping VCs demonstrate progress with their own investors – or because they believe that the only way to compete with others is to promise developers and early adopters the same unrealistic financial returns.

A better approach

It doesn’t have to end this way. Crypto is transformative because it allows two parties to act directly without relinquishing control to an intermediary: Alice can send value to Bob, enter into a financial contract with him, or transfer ownership of a digital asset or artwork with little friction and cost. Crucially, although they can still use intermediaries to streamline these tasks, Alice and Bob have more control and bargaining power. Like the Internet, crypto networks are open networks, and this openness gives consumers and businesses more choice, lower prices, and new products and services.

So how can crypto deliver these benefits? Entrepreneurs and investors must reject current calculations and develop new ones. These new metrics must be closely aligned with the impact a crypto application hopes to have on the world. Ironically, this is exactly how inventors and founders have always created value: recognize a problem worth solving for your customers, and stake your startup’s existence on solving it. By obsessing over the problem to be solved, rather than about early crypto prices and volatility, entrepreneurs can go back to identifying metrics that track progress toward a solution.

For example, founders who want their crypto network to replace traditional payment rails should measure their growth against the same metrics that payment players have been using for decades. They should also directly measure the savings they bring to consumers and businesses as they rebuild basic financial services using crypto. Likewise, Web3 entrepreneurs focused on giving the creator economy more choice and competition should measure the economic value they pay out to creators and compare it to the incumbents. If it’s true that crypto can truly remove friction and empower creators, these new metrics will quickly demonstrate the benefits the technology brings to society.

The payoff of going back to basics is significant. Computing can turn the complex problems crypto hopes to tackle into manageable problems that entrepreneurs, managers, and engineers can optimize on, while giving investors, consumers, and even regulators a much better appreciation of the nascent space. It is only by crossing the divide between the digital records on a blockchain and their impact in the real world that crypto will make a difference, and building better cryptometrics is a prerequisite to unlocking this potential.