The next wave of Crypto-millionaires is here; but the party may be ending soon.
Get a Lambo in a week.
Variations of the phrase have become a staple phrase in the ICO community, a joke to many, but to quite a few, not far from the actual truth.
$1.2 Billion, that’s how much ICO’s have raised in the last year; the last 2 months in particular, they have surpassed internet VC funding globally.
Short for Initial Coin Offering, ICO’s are a way of crowdfunding through Cryptocurrency, namely Bitcoin; and the second largest cryptocurrency, Ethereum. Users exchange their coins for a new “token” — usually a stake, in either a piece of the new company, a percentage of profits or sometimes even just recognition that you help fund an idea. It’s not all too dissimilar in concept to an Initial Public Offering.
Instead of going through traditional funding channels like venture capital firms and incubators; Startups are increasing turning towards Bitcoin and Ethereum users to raise the much needed capital.
A typical ICO consists of a few components:
A Token
A creation of a new cryptocurrency coin or “token”. These new tokens be distributed among investors. Often, these tokens are tied to another cryptocurrency; into its blockchain. It’s a way of saying they use the infrastructure of a cryptocurrency like Ethereum, but for the new, separate token.
A Whitepaper
A detailed advertisement of the project and its goals, hoping to win over Crypto users and their coins. Often whitepapers are professionally edited and aesthetically pleasing; plopped onto beautiful websites with slick team photos and alluring infographics. Enticing and polished, whitepapers are often the main or only piece of information investors have access to.
History repeats, sort of.
This current gold rush of investment into the digital space isn’t the first time digital currencies have experienced explosive growth.
In late 2013, Bitcoin had climbed from about $12 to a $1242, a 10,000% gain. This incredible run yielded a large crop of “Bitcoin Millionaires”, wealthy early adopters who often invested little now found themselves striking it rich in digital currencies.
Someone who invested $500 into bitcoin at $12, could find themselves with $40,000 had they not sold early (about $180,000 if they still held it today). This abundance of new wealth created massive euphoria for many; and if you’ve made so much, in so little time; why not think it can be done again.
In came altcoins, digital currencies similar to bitcoin, in many cases clones which offered minor tweaks like faster transaction times or a large currency supply. Many were hailed as the “next big thing”; some claimed to be the “Bitcoin” killer, improving on the design and hoping to displace Bitcoin as the king of digital currencies.
Fancy websites and slick wallets appeared, enticing Bitcoin holders to trade their coins in exchange for this new currency. Anybody could create their own cryptocurrency, within a few months there were hundreds of different coins listed; new exchanges popped up offering users to trade their Bitcoins for currencies like Litecoin, Ripple, and even Dogecoin (based on a meme of a dog).
Quickly made, Quickly spent.
To a person who is up to $40,000 on a $500 investment, what is $4000? After all it’s only 10%; in the minds of some, it’s a small risk for the possible reward of investing in the next Bitcoin. A popular sentiment, this created a massive flow of investment in altcoins. By February 2014, Dogecoin had a market capitalization of around $87 million; quite a large sum for a digital currency of a running gag.
To some the alarm bells were going off, investors were playing fast and loose with their money and hundreds of millions were inflating the digital currency market. Even services where you could pay 0.2 Bitcoin (at the time around 200 dollars) to create your own cryptocurrency appeared; if you had an attractive website and wallet, the chances were good that people would invest in your cryptocurrency. This is not to say there were some novel and useful coins; but many had little to offer other than a different name.
The clouds got dark.
While Bitcoin was at an all-time high, the shutdown and subsequent bankruptcy of Mtgox (the largest Bitcoin exchange at the time), brought in a bear market, slowly the price started slipping downwards. Initially, some saw altcoins as a safe haven away from Bitcoin’s Mtgox troubles; and for a few months, the party continued.
Then it all caught up; when there were hundreds of altcoins, finally the fatigue set in; market caps dropped, many of those hundreds of millions were erased as the demand for altcoins pulled back and the selling wave rode in. Some of the top coins retained their position, but for the rest, a collapse into obscurity. Tens if not hundreds of millions in assets were erased. Quickly spent, quickly lost.
Unsurprising surprise.
The timing of a pullback was hard to predict the inevitability of it; was not. For months, crypto-enthusiast were buzzing about the “next big coin”, it was about pumping, chatrooms were full of users praising various coins, hoping to attract more buyers and inflate the price. Smear articles and posts on competing coins were abundant; murmurs and rumors of paid-for-reviews swirled around. It was more about the price than it was about the coin; whether the digital currency would have the utility it claimed was secondary to whether it could bring a quick financial return.
Familiar Faces.
For almost 3 years, digital currencies were in a bear market, moving up and down but hardly above all-time highs. From January to now, Bitcoin has went from $1000 to over $4500, but even that is modest, compared to Ethereum, exploding from $10 to about $400. Ethereum as it turns out, maybe have been the “next Bitcoin” for return hungry investors.
Ethereum has now created a similar boom like Bitcoin did with altcoins, but now with ICOs. Differing from Bitcoin in its aim to proliferate the use of the blockchain (the underlying technology of cryptocurrencies) to allow smart contracts and decentralized application development; part of which easily allows anyone to create an ICO.
Quickly made, quickly spent.
The “next big token”; deja vu. There are now hundreds of ICOs, and millions being staked on finding a “winner”. It’s becoming less about the company behind the token, and more about the means to make a quick return.
Almost like a procedural drama, the script is predictable. From decentralized blockchain databases, to online casinos, to social networks, there is no shortage of ideas that are being funded. Admittedly, some of them do appear to be interesting concepts, even if all users have to go on is a whitepaper, that 10 page document prepared and vetted by the people asking for your money.
Humour has a price.
Quite literally, how much would be willing to pay for a token called “FUCK”. The token is built on a joke, not unlike some early altcoins. In July, FUCK had their ICO and from August 30th to August 3st (one day if you’re counting), it grew from a market capitalization of approximated 600 thousand to 6 million. Some were happy to throw money to be part of the joke; quickly made, quickly spent.
While an extreme example of playing fast and loose with your money, the funding of joke tokens signals just how much risk users are okay with taking on; after all what’s $1000 when your $500 dollar investment in Ethereum is now worth $50,000.
A Rinse.
At some point, the oversaturation of ICOs and the realization that many will never actually materialize into a functional product, service or company will make cause a pullback. The seller’s market will arrive and suddenly prices will collapse as panicked investors will realize that they’re actually not that okay with losing their entire ICO investment.
Like altcoins, the pullback will collapse prices for many ICO tokens; save for a select few that will weather the storm.
There will be some that survive and prosper undoubtedly; maybe we’ll witness the rise of the “next” Bitcoin, Ethereum or even Google. The problem is everyone thinks their token will reign supreme; there are many attendees in this game of musical chairs; but very few seats. For many, the party will end sooner than expected.
Disclaimer: This article is not meant to dissuade anyone from investing in ICOs. There are some fascinating and innovative projects that may turn out to be incredible in the years to come. As with any investment, it’s always good to invest only how much you are comfortable losing; extensively research the organization and evaluating their long terms prospects. A major pullback in ICO tokens may be great for cyrptocurrency in the longterm; weeding out weak ideas and splashing some cold water on investors faces. Remember the dotcom bubble; it didn’t halt progress in the online sphere and neither will the popping of an ICO bubble. I’m confident that Blockchain technology and cryptocurrencies will only grow faster in the long term.