The Number One Reason Most Crypto Projects Will Fail

My newsfeed is quite often filled with "listicles". You know the type of article that I’m referring to. They have titles like “five to things that you should do if you wish to live longer”, or “eight habits shared by all high performing business executives!”

While these articles are generally pretty vacuous, I try to read one or two occasionally as they can sometimes be filled with hidden gems of information. Recently I read one such article and it made me pause to think about how I view my crypto currency investments.

The article was titled “The Number One Reason Why Start-Ups Fail.” The article did not address crypto currencies directly, but tackled the more general issue of why some new businesses succeed while many others will fail. The opinion of the author was that the number one reason why new start-ups fail is that the problem that they are trying to solve is not big enough. In other words, it’s not that the new business’s product is not useful, but more often that is not useful enough, to enough people, to make the project commercially viable.

I can illustrate this with an example from my own personal experience. Several years ago, in my role as an investment adviser, I met with a potential client who had started a company to manufacture a product for pet owners. We’ll call him Joe for the purposes of this article.

Joe had identified that many people like to take their dog with them when they go to a café, and that quite often there was nowhere convenient for the dog owner to tie their dog up whilst they go inside. Joe devised a product which he called “Pet Parking “ to solve this problem. It was in essence a small hook that the café owner would fix to the wall outside the café so that you could conveniently ‘park your pooch’ whilst you went inside and placed your order. It was the dog owners equivalent of the hitching rail that you often see outside the saloon in an old Western movie.

Now it is not that “Pet Parking” isn’t an issue. I’ve got a dog. I like to go to cafés. Quite often it can be an inconvenience when there isn’t somewhere to park my pooch. Realistically though it’s not that big a problem and there are a variety of ways that I can work around it.

I can sit outside with the dog while my wife goes inside and orders, or I can tie her leash to any other convenient fixture such as a park bench or a handrail. Ultimately what often happens is that I simply go to a café is where it’s convenient to take my dog. It would be great if every café was purpose designed to accommodate my pooch, but at the end of the day pet parking just isn’t that big an issue in my life.

Joe was a true believer in his solution however, and invested over $70,000 in the project. Needless to say, the product never took off and I suspect that Joe lost his entire investment. I would argue that the problem that Joe was trying to solve was simply not big enough.

How is this relevant to crypto?

As with most things in my life lately, this article got me thinking about crypto. Crypto projects at their hearts are start-up businesses. They may not fit some of the other definitions that we apply to traditional businesses, but in the simplest sense, crypto projects are groups of people who are trying to solve problems. Just as is the case for other start-up businesses, the likelihood of a crypto currency being successful is intrinsically linked to the size of the problem that that the project is trying to solve.

If you apply this line of thinking to your crypto currency investments it provides you with another tool that can help you determine which projects are likely to be successful, and which are likely to fail.

Consider the grand daddy of all crypto currencies. Bitcoin.

Bitcoin was created directly as a result of the loss of trust in traditional financial institutions that flowed from the Global Financial Crisis (GFC). People need the ability to transact via a commonly accepted medium of exchange, but many were so disenchanted with mainstream finance after the havoc that the GFC wrought that they felt a new solution was needed. Replacing a large chunk of the global financial system is a problem of epic scale.

Contrast this with the example ofa crypto project that I examined many months ago and whose name I can now no longer even recall. This project was based around the provision of serviced office spaces to young professionals that could be paid for using crypto currency. This is a service that I am very familiar with. I regularly utilise serviced offices when I am travelling to see clients. An inability to pay for these services in crypto currency has never been an obstacle for me. That’s not to say that we won’t one day be paying for services like these with digital currencies, but a lack of crypto currency enabled commercial office spaces is not something that keeps me awake at night.

I’ve not reviewed the progress of this project in many months but would argue that the problem that it is trying to solve is so niche that it will be very difficult for this project to succeed. When there are so many compelling and creative projects in the crypto currency space to choose from, this was not an investment that I found compelling.

Start-ups fail for many reasons. There are a multitude of different crypto projects to choose from when making decisions about where to invest your money and they will succeed and fail for a variety of reasons. As a simple rule of thumb however, giving consideration to the simplest of questions: "What Problem Does This Project Seek to Solve?" can be a very useful tool in weeding out some of those which are least likely to be successful.

Photo by Josh Seff on Unsplash