How could the ICO Hype Develop on Such an Unprecedented Path?

Blockchain Universe is not just Ethereum

A few days ago I read a great post by Avtar Sehra on “ICO and Economics of Lemon Markets” and participated in the discussion around it. Actually, it inspired me to dive a bit closer into the ICO topic.

This post deals with the ICO Hype as a particular phenomenon within the Blockchain universe and is a means to structure my own thinking. To be more specific, it deals with Ethereum-based ICOs representing the by far largest chunk of this ICO hype. In fact, Ethereum’s *ICO success story* which is in its very essence a*Smart Contract success story* could be the worst enemy for the blockchain universe. It provokes regulatory measures with sustainable negative implications for all other blockchains.

Bitcoin is a completely different story to me when it comes to ICOs and as far as I can see even regulators take this position.

The Turning ICO Tide

Over the last couple of days, the negative sentiment around ICOs hype significantly increased. At least in my social networks on LinkedIn, Medium, and Twitter where links to critical articles are more often shared than links to ICOs and postings with a negative attitude receive far more comments than positive postings around ICOs or ICO events. It’s kind of a counter-movement.

Regulators around the globe obviously recognized that they have to do *something* but still struggle with the *what* and *how*. SEC issued an ICO-related investor warning on “pump-and-dump and market manipulation schemes” lately, the Chinese regulators are said to work on a ICO regulation paper as the Canadian securities regulators do.

The tone in critical postings becomes increasingly aggressive against ICOs and their respective teams. Startups preparing for an ICO should be very careful and expect more critics than funds. If you have followed the last ICOs they haven’t been too successful anyway. The successful ones have been organized by the U.S. guys and have not really been typical ICOs but rather “Private Token Placement”.

The Dot-Com Bubble and ICOs

Some of us have been around in the New Economy Hype with the *irrational hype* we saw around internet shares in the so called dot-com bubble. I have been around then, participated in IPOs, had a lot of headache and troubles after the crash and wrote a book on the Dot-Com Bubble in 2002 (German, sorry, but the translated title is “Slaves of Greed”). I am mentioning this just to give the reader background information. Just recently, I flipped through my outdated book and had a Déjà vu.

Remember when the NASDAQ Index cracked the 5,000 mark in 2000? Back then it was just a handful of regulated exchanges and some cultures and jurisdictions that participated in this hype with the NASDAQ as its epicenter. The Silicon Valley-driven New Economy Hype was more or less restricted to the western hemisphere and Japan. Eastern Europe, South America, Africa, China and many other regions have been on the sideline, watching.

My book on the Dot-Com Bubble published 2002 (German Edition only)

Regulators and regulated exchanges in the then participating jurisdictions took a similar and coordinated approach towards internet IPOs which was based on a common cultural understanding and a close integration of the respective capital markets.

Internet start-ups back then had severe restrictions and needed to make comprehensive due diligences with auditors, lawyers, and experts to conduct an IPO. They needed to find investment banks, exchanges needed to give their permissions and they had jurisdictional limitations on what they were allowed to do. Moreover, back then social media simply not existed, no chance to go viral via Google, Facebook, Twitter or LinkedIn. No bloggers or forum heros were around to promote IPOs.

Looking back we know that there was still not enough governance whatsoever to avoid the *irrational exuberance* but at least there existed some rules and a *check-and-balance system*in place and regulatory authorities chaired the development. And the New Economy dealt with a known asset class — stocks aka equity.

The ICO Environment and The Token Feast

The current ICO Hype is a far more *advanced* irrational development powered by more than just a new technology.

In the first place, it’s a social media-powered multi-cultural and multi-jurisdictional phenomenon with all continents and many cultures participating. We see ICOs and investors from developing and/or emerging countries looking for money to fund their projects or to make their fortune. And if we learned one thing over the span of the age of globalization: one should never underestimate the cultural differences especially when it comes to money and investments. It’s perhaps the first hype for the majority of people in Eastern European, China, South America, for example.

In the second place, contrary to the New Economy and their IPOs ICOs are done without regulation or regulated entities and until recently even without regulatory guidance. Multiply this issue by the number of participating jurisdictions and you may grasp the whole picture. This is about to change with first *soft-guiding* statements from the leading regulatory authorities like SEC (US), MAS (Singapore), FCA (UK), BaFIN (Germany) or CSRC (China) but over the last couple of months the unregulated ICO environment inspired a lot of people and teams to conduct ICOs raising somewhere around USD 2 Billion from investors over all jurisdictions.

In the third place, Vitalik Buterin and his team introduced Ethereum and Smart Contracts to the then bitcoin blockchain universe establishing the necessary techno-organizational tools to conduct ICOs without hardly any work to do. The Ethereum Foundation provides the necessary Smart Contract templates for free download. Ethereum and ICOs, in turn, have sparked the growth of unregulated cryptocurrency exchanges that attract thousands of speculators. It’s a kind of vicious circle.

There are no generally accepted accounting rules in place, no code of conduct, no central authority and not even a jurisdictional framework, hence no checks-and-balances and, best of all, we deal with a completely new asset class that is not even defined or understood yet. These are the ingredients for a very explosive (spicy) dinner we are served with right now. So make yourself comfortable and enjoy the feast, there is no way to stop it right now anyway. But be prepared for some hangover too.

The Crypto J-Curve and its Amplifliers

Let’s start this paragraph with credits to Chris Burniske and his post on “The Crypto J-Curve”, an important piece of work to develop a better understanding about the nature of cryptoassets. I would like to refer to this post and its conjectures for further thoughts.

We are confronted with the basic Crypto J-Curve based on blockchains and its cryptoassets (tokenized assets). The J-Curve model is applicable to almost any new technology and has been viable for internet stocks and the dot-com bubble too. What differentiates the Crypto J-Curve from the “Internet Stocks J-Curve” is the amplification by two other phenomena:

  • Socio-Economic Amplifier: the social media-powered multi-cultural and multi-jurisdictional approach along with an
  • Regulatory Amplifier: the Ethereum- & Smart Contract-driven disruption of regulatory frameworks in all jurisdictional regimes enable and stimulate unregulated fund raising & investments;

Hence, the ICO hype around the Crypto J-Curve actually is the result of the unleashed as well as unregulated socio-economic energy feeding kind of a “Super Hype” using Ethereum as the enabling tool. ICOs are accumulating an awful amount of social energy that will finally lead to a new global economic as well as jurisdictional order. After the inevitable crash and the subsequent recovery! The latter may take longer than after the dot-com bubble because of the amplifying effects that need to be digested too.

Let me share some background information with you that led me to my assumptions.

Google Analytics Bitcoin site (March 2015)

I have been in the Bitcoin ecosphere since 2013 and had the honor to work with great people in Eastern Europe (Russia, Ukraine, Bulgaria etc.) and Asia. Back then it was those people that ignited the Bitcoin movement. Please have a look at the Google Analytics screenshot from one of our Bitcoin sites as of March 31, 2015. Site visitors from Emerging Countries by far outnumbered site visitors from Developed Countries.

To Eastern European and Asien people, Bitcoin was a means to address the hyperinflation they experienced in their local currency and a new earning opportunity. Back then in 2015, we had a Bitcoin joint venture in Kiew and the developers over there preferred to receive their payments in BTC instead of USD, let alone the local currency. In a nutshell: the early Bitcoin phenomenon was driven by people from countries with extreme low purchasing power and high inflation rates.

Many of the great and gifted technicians in those countries are behind the ICOs we experiencing. The dawn of the Crypto J-Curve has not been a Silicon Valley-ignited development but an Eastern Europe-driven one. The U.S. guys joined the party later then. From my personal experience, I can tell you that the opportunity to raise funds via Blockchains and ICO was a unique opportunity to the software engineers and founders in emerging regions. Most of those talented people and teams have not been able to raise money from VCs before due to local legal restrictions and the very absence of a venture capital culture even though those guys have been at least as ingenious as developers in Silicon Valley or other places in the developed world.

I am still convinced that the ICO opportunity unleashed the great potential of developers in Emerging Countries.

What Comes Next?

I love the quote “History doesn’t repeat itself but it often rhymes” and thus we could maybe take the Dot-Com Bubble as a role model for the to be expected ICO hangover. I suggest to read TwoBitIdiot’s post on “ICO Ethics, Filecoin, Short-term Fear & Long-term Greed” to learn more about the possible scenarios about how the ICO hype could end:

The things that could freeze the frothy quasi-securities market overnight are well-known: (a) the SEC shuts down some of the major exchanges, vaporizing liquidity, (b) investors suddenly realize “assets” like Dogecoin shouldn’t have $5mm of daily trading volume and $200mm market caps and start to dump, setting off a rapid and vicious cycle downwards, © new ICOs stop popping 2–10x between pre-sale and on-exchange listing, and investors decide the risk-reward on ICO “flips” has gotten out of whack, with anticipated risks (a) and (b) outweighing potential spoils.

My personal asumptions are:

  • Cryptocurrency exchanges will be regulated across the most important jurisdictional regimes pretty fast(already started);
  • Ethereum as ICO platform will become a regulated blockchain and/or implement a self-regulating *code of conduct* for ICOs (China allegedly started thinking about it);
  • Ether (ETH) exchange rate could take a massive hit because of regulation and/or ICO failures;
  • a lot of “new investors” will be very disappointed and we may see a wave of litigations going on between ICO startups, founders, and investors in a multi-jurisdictional environment;
  • Cryptoassets will turn out the *next generation* investment vehicle with blockchain-based trading environments in a regulated environment but this may take a few years.

I am still bullish when it comes to blockchain concepts, distributed ledger technologies, and cryptocurrencies but I am (obviously) bearish when it comes to the “current-style” ICOs.

Whether you agree or disagree with my views, it would be great anyway if you share my post for further discussion and/or let me have your comments.