Why do ICOs continue to bring in record amounts of money?
The year 2017 will be remembered as the year of the ICO. And I’m not the first to state it.
Blockchain technology startups have been front and center in 2017 following the wave of record-breaking capital raises in the form of Initial Coin Offerings (ICOs or alternatively called Token Sales). Much like other startups, these companies are trying to raise capital to get their idea off the ground. The difference has been, however, that these adventurous startups have sought to crowdfund capital for their ideas by going directly to individuals and bypassing traditional venture capital. In exchange for their investment dollars, retail investors have been sold “tokens” which could either be redeemed for a service in the future, or is pseudo-representative of ownership in the company itself.
It’s like Monopoly
The best analogy to understand this is the Monopoly board game. For you to play, you need to first get some in-game currency to transact, buy properties, build houses, and get out of jail. But unlike the actual game where you just get the money, this version requires that you “buy-in” to get the in-game currency. So you need to trade your US dollars for Monopoly money (a.k.a. you need to buy tokens). Now, imagine that the board wasn’t actually made, the properties had yet to be defined, and the only document you had to decide whether to buy-in or not was a partially finished game manual. That is basically what ICO’s are.
There’s more… The other thing about 2017 is that with skyrocketing prices a few people have made a lot of money, so everyone else is starting to get some FOMO. They want in on the game, but the game has a limited amount of currency. So, how do the people who want to play Monopoly but weren’t able to buy in the original sale participate? They buy in game currency from people who bought early and are willing to sell, usually at a higher price than they bought it for.
These secondary buyers then tell their friends what an amazing investment they just made, because the guy they bought it from made a ton of money. So what happens? The friends want to get in on it too, so these secondary buyers sell their recently acquired tokens for an even higher price. That is basically how you get the ICO craze of 2017.
So every ICO is its own Monopoly game?
Yes and No. This is where it gets a little complicated.
The majority of ICOs (sometimes collectively referred to as alt-coins) are created with a specific purpose in mind. Similar to the function of Monopoly money for purchasing ‘houses & hotels’, customers who wish to use specific blockchain products have to buy the token associated with the platform. Due to this characteristic, it’s important to remember tokens are for using a product, not for saving, investment, speculation, or trading.
Some of the best examples of the utility of tokens in recent ICOs are:
Filecoin & Storj — file sharing and cloud storage (i.e. Dropbox)
Augur & Gnosis — betting and prediction markets (i.e. Bovada)
Ethereum & Golem — distributed cloud computing (i.e. AWS or Google Cloud)
[Note the above is just a selection of some of the most popular ICOs, not an endorsement or recommendation for investment. For deeper analysis check here.]
So you’re probably already thinking how does Bitcoin fit in all this? At the risk of stretching the analogy too far, let’s look at how you can use Monopoly money. If you tried to use your hard earned Monopoly money at McDonald’s, the cashier would probably laugh at you. That’s because Monopoly money holds basically no value outside of the game, it’s just paper. But remember how we said there was a finite supply of it, and people would compete to buy some because they want to be a part of it? Well, in that situation Monopoly money might actually have value outside the network and you might not get laughed at if the cashier knew what it was worth. This is the situation with Bitcoin. Many people want to get in on Bitcoin, so they are paying higher and higher prices. (Additionally, many ICOs require you to use bitcoin to buy tokens, which further drives demand for bitcoins.)
It is because of this we call Bitcoin a financial security token. There is no functional use for Bitcoin within its ecosystem, its only function is to easily transmit value. (Like Monopoly money but without the game.) For this reason people claim Bitcoin could replace money. But Bitcoin is the exception. Most ICOs have a utility and their raison d’ être is as a utility. They are meant to be used for something. The difference between these two is very important.
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