The ICO Bubble

Josh Nussbaum
6 min readMay 15, 2017


The fact is that a bubble market has allowed the creation of bubble companies, entities designed more with an eye to making money off investors rather than for them. Too often, an IPO, not profits, was the primary goal of a company’s promoters.

- Warren Buffett in his 2000 annual letter to Berkshire Hathaway shareholders

In the late 90’s, companies like Kozmo and Webvan saw their stocks soar to incredible heights despite mounting and unsustainable losses. One well-known investor however wasn’t buying it. Pundits began to wonder if one of the most influential investors of all time, Warren Buffett, had lost his touch and articles with titles like “What’s Wrong Warren” and “Buffett Hits a Bumpy Road” graced the headlines of well-known publications.

As Internet usage increased, investors became more and more bullish about the prospects of dot-com companies using this new medium to build companies that could serve the whole country on day one. These Internet companies spent wildly to create brand recognition and network effects in the hopes of capturing markets. The vast majority had mounting losses but that didn’t deter investors as the prices of their stocks continued soaring to new heights. What happened next seems obvious in hindsight, but at the time investors believed that these companies couldn’t lose. As bubbles go, the fear of missing out took hold as retail investors saw everyone around them getting rich and didn’t want to miss out on the party.

Many people lost vast sums of money during that time due to this irrational exuberance. However, entrepreneurs and investors were right about one thing — the Internet would change our lives forever and there would be tremendous value built as a result. Companies like Google, Amazon, eBay, and Netflix were started around this time, with collective market caps today of over a trillion dollars.


Fast-forward to today and a new technology protocol, founded under the pseudonym Satoshi Nakamoto, appears to have many of the same characteristics of the dot-com 1.0 era. The blockchain technology and the original token, “bitcoin” has generated interest from entrepreneurs, enthusiasts and larger companies over the course of the past 5+ years.

In 2013, one of these enthusiasts, an early bitcoin programmer named Vitalik Buterin proposed a new platform called Ethereum, that simply put, would allow developers to build “smart contracts”. These are programmable transactions that align incentives between developers and the users of their protocol or application through a token mechanism. This token mechanism could be used to reward users for participation in the network and developers for their work. As we saw in the early days of bitcoin, the first waves of participants in these networks could become tremendously wealthy as usage increases and drives speculation. The promise of which could drive early users that believe in the value proposition of new networks to secure very cheap tokens early on.

After a short drought in terms of new companies started in the cryptocurrency space, Ethereum yielded developers with the means to deploy self-enforcing smart contracts which can be used to facilitate automated processes in countless markets, use cases, and industries. This novel concept has begun to encourage more people to develop protocols and blockchain-based decentralized apps (dapps) with the hopes of creating a positive feedback loop — whereby developers and users are incentivized to drive usage.

To try and explain this in a way that’s easy to comprehend, lets think about it in terms of today’s public companies. Take eBay for example — imagine that each share of eBay’s stock wasn’t a “share” but instead was an “eBay token”. Not only does that token represent access to participating in eBay’s marketplace as a seller, but in order to purchase anything from eBay you would need “eBay tokens”. Developers would be incentivized to continue to build the platform as their “eBay tokens” would become more valuable as the network grew which also drives speculation (like in the stock market). Sellers who believe in the promise of the service would be incentivized to use eBay if they were to believe that the value of the “eBay tokens” would rise over time. For example, if the network grew in size year one, the result could be one eBay token rising in value from say $1 to $3. A seller could then sell a rare collectible for 10,000 tokens which, if held for a year’s time could net them 3x the initial sale price.

When put into these terms, it’s easy to see why developers, users and investors are so excited about the promise of crypto-tokens. When a new project in the space announces the intentions behind what they’re building, the developers typically publish a white paper and at some point afterwards, hold an ICO (initial coin offering).

The “Ethereum of the Dot Com Bubble”

This is reminiscent of Netscape’s introduction and subsequent IPO in the mid-1990’s. For the first time, Netscape brought the Internet to the masses. Early on, the Internet was used almost exclusively by more technical people since it was basically UNIX on a terminal without graphics. There was interest in the technology, but the use cases weren’t clear and it was often thought of as a repository and for information storage (this too sounds oddly familiar to how the masses thought about bitcoin and the blockchain early on). Netscape’s browser provided people with a graphical interface that made it easy to browse the web, connecting people who could afford a computer and Internet access. This spawned the market for websites and Internet services which laid the groundwork for the boom and bust (and boom once again thereafter) that would follow.

Just like how Netscape showed the world what was possible and laid down the groundwork for the flurry of Internet companies that could now be accessed by the masses, the introduction of Ethereum, “smart contracts” and dapps has brought about a flurry of new projects as well as well as new protocols. Instead of IPO’s the developers of these projects sell crypto-tokens in ICO’s (Initial Coin Offerings). However, also like the Internet stocks in the 90’s, ICO’s have gotten out of hand recently. Just a few weeks ago, Gnosis, a predictions market that allows users to bet on the results of future events, rose to a market cap close to $300M at its ICO.

History Doesn’t Repeat Itself But It Does Rhyme

It hasn’t really mattered what the actual project is or if there are any users at the time, as the token prices are soaring on the dates of these ICO’s. So long as they had the word “Internet” in their business model, companies in the 90’s would go public and see their market caps soar despite the state of the actual business at the time as well. As investors see soaring prices, the fear of missing out takes hold so they too buy these tokens, which in turn drives other investors who don’t want to miss out to do the same, further driving up the prices. As the old adage goes however, “history doesn’t repeat itself but it does rhyme”. We know from history that these virtuous cycles don’t last forever and eventually bubbles have to pop.

That’s not to say I’m bearish on the crypto-token model long-term. Like the Internet, there is good reason to be excited about several of these projects today and in the future. The big reason is that, by aligning incentives between all stakeholders, networks can grow faster, providing just the type of positive feedback loop that can unseat centralized incumbents with their treasure trove of data and cash. At the same time, developers can work on projects that users want and need but previously there was no clear business model for (like protocols).

As Joel Monegro from Union Square Ventures said to me, everybody talks about zero marginal distribution costs to delivering products over the Internet but this axiom isn’t actually true. With blockchains though, not only can data become commoditized (which collapses margins) but as protocol usage rises, services and the cost of delivering the service decline as well. The result is that early users see their tokens become more valuable over time, making the service dramatically cheaper for them (approaching zero). Furthermore, a thriving network will also bring down the costs for users that join the service later on as well.

In the end, I do think we’ll see very valuable projects emerge from this time (like the early days of the Internet) but these projects must solve a real problem for users and if they issue tokens, they must be at the heart of a strong positive feedback loop that incentivizes all sides to participate in the network. At Compound, we’re putting our money where our mouths are — having invested in Blockstack’s most recent round and hope to make more investments as well. If you’re working on something interesting in this space, I’d love to hear from you!



Josh Nussbaum

Halcyon Health Co-founder. Former Partner @ Compound.