Am I Too Late?

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If you’re spending time on Twitter, or reading about NFTs selling for millions at Sothebys, or peeping crypto jobs at Stripe, or watching El Salvador adopt bitcoin, you might think crypto is mainstream. It’s done. It’s over.

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But it's not. We're early. So early in fact, that if crypto adoption were mapped to the history of internet usage, we'd be in the mid-90s.

Even though crypto should theoretically bring forward the rise of transparency, for several reasons, calculating crypto adoption isn’t straight forward. What’s even more difficult is predicting how big crypto can ultimately be. My framework for estimating adoption uses two vectors:

  1. Breadth: number of unique crypto users
  2. Depth: enterprise value per user created from leveraging cryptonetworks

Let’s go into each.

Breadth:

It’s hard to measure unique crypto users. You can’t just sum all unique wallets because users can have multiple wallets and live on multiple exchanges. Identity verification still only exists at the point of a fiat on-ramp. Crypto.com released a report in July 2021 estimating a total of 221 million crypto users globally. Triple-A claims there are 300 million users. Coinbase alone has close to 70 million verified users.

Let’s use Crypto.com’s 221 million number. That might sound like a lot of crypto users, but with a global population of 7.9 billion people, crypto penetration is only 2.8% on a pure capita basis. When compared to global internet penetration, crypto is in 1998. Let’s use US adoption as a second data point. According to NORC, 13% of the US purchased or traded cryptocurrencies in the last year. Once again, if we compare that penetration number to US internet adoption, crypto is in 1996.

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The technology adoption life cycle framework is an extension of the diffusion process model originally created by Joe M. Bohlen, George M. Beal and Everett M. Rogers in 1957. The framework has evolved over the last 60 years, but has five different buckets of adopters (language from Rogers’ Diffusions of Innovations, 1962):

  1. Innovators (2.5%)
  2. Early Adopters (13.5%)
  3. Early Majority (34%)
  4. Late Majority (34%)
  5. Laggards (16%)

If we apply crypto to the Rogers’ adoption framework, we see that crypto has now passed the “innovator” phase globally and is in the “early adopter” phase in the US. In and of itself, entering the “early adopter” phase represents a significant milestone.

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However, counting unique users that own crypto drastically underestimates true adoption. As we all know, there are two components that drive token value:

  1. Utility (you actually want to use it)
  2. Speculation (you think someone will pay more for it in the future)

In reality, the vast majority of the 221 million users have either been dormant or have only interacted with crypto to trade (speculation). The latter is especially true in a bull market. While defi, NFTs, and play-to-earn games are expanding crypto’s reach with utility, my guess is utility use cases account for less than 10% of crypto user adoption. While price speculation could be a feature-not-a-bug for customer acquisition, my sense is that we’re still in the innovator’s phase from a utility perspective and unique users can comfortably grow 15-20x over the next 10 years.

Depth:

Most people assume that cryptonetworks will grow to be as large as traditional tech or cryptonetworks will be valued similarly to traditional tech companies. Both of these assumptions are incorrect.

Let’s use global crypto market cap as a benchmark for depth or, in other words, how valuable all cryptonetworks can be. In the current bull market, crypto’s market cap is $2.53T, which is slightly above Apple’s market cap of $2.46T. In total, the top 500 tech companies today are worth $25T.

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There is line of sight to a 10x if you assume that crypto’s total future value will be equal to the current tech ecosystem. This is understated for two reasons:

  1. We are in a bull market where our adoption proxy is inflated because of speculation
  2. We are falsely assuming cryptonetworks are valued on the same multiples basis as traditional tech companies. In reality, crypto’s depth can be far bigger. Interoperability between protocols and bit-to-bit communication will increase the velocity of tokens allowing far deeper productivity - and thus value per participant

M13 recently outlined this concept in their post Crypto and the Consumer Road Ahead. M13 builds on top of Joel Monegro’s Fat Protocol post to show that cryptonetworks allow both the protocol layer and the app layer to be investable. Instead of a “thin” app layer, we will see the emergence of “fat” protocols and “fat” apps - drastically increasing the multiple of the sector.

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How big can web3 get? M13 goes on to compare web1 to web2 in order to estimate the size of web3:

The overall size of Web 2.0 materially surpassed that of Web 1.0, and we believe Web 3.0 will surpass the size of Web 2.0. We have used the Nasdaq-100 index as a barometer for the current Web 2.0 market cap (this grossly understates the true global size as the index focuses on public, U.S.-based equities). Today, this index is seven times larger than the aggregate market cap of the 280 companies listed in the Bloomberg U.S. Internet Index in 2000, which we can use as a gauge for Web 1.0’s peak market size. We expect a greater pattern to occur with Web 3.0 surpassing Web 2.0 given that these networks are tokenized and measurable.

We can see from the scale of web1, that crypto’s current market cap is the late 1990’s, aligning with the breadth benchmark outlined above.

How much more growth is there?

A lot. Layering both breadth and depth on top of one another, crypto will grow 100-150x over the next 10 years. There are massive tailwinds behind the teams building in the space, much like the internet in the 90s or mobile in the 2000s. In crypto, those tailwinds have historically been marked by boom and bust cycles, but will be moderated over time as adoption and capital stabilizes. The next time you think that crypto is fully saturated, just remember that it is very, very early.

Keep in mind that this piece is not advice for you to sell everything and buy tokens. This is a reminder about how truly early development and adoption is in crypto and how exciting it is to be entering into the early adopter phase. Crypto prices have always been cyclical - given speculation, bull markets overstate development and bear markets understate development.

I’m excited about crypto’s path forward and dedicate the majority of my time to the space. I’m looking to connect with those who are meditating on the space and leveraging crypto to build the next fundamental products. A post wouldn’t be complete without me plugging myself.

Notes:

1. I am a personal holder of BTC, ETH and other tokens which aren’t relevant for this post. Canaan Partners is an investor in Rally, Forte, Paxos, Skale Labs, y.at, and Commonwealth. This is not financial advice.

2. Thoughts condensed through conversations with Latif Peracha at M13, Eric Ong at Lightbank, and my colleagues Jared Newman and Brendan Dickinson. Special thanks to John Necef for editing.