“History doesn’t repeat itself but it often rhymes.” Mark Twain’s observation is as true today as ever. It fits the bill for so many different things ranging from music and fashion through to politics and technology. Ideas get re-cycled with a dynamic twist, and some magical marketing dust applied and the merry-go-round starts again.
To those of you that remember the high pitched shrill of the 14.4k modem as you first connected to “The Information Superhighway” will probably have a wry smile of cynical reflection on the dot-com boom as another bubble seems to be inflating with hot-air balloon speed in the blockchain space.
The new kids on the decentralised block – crytpocurrencies and ICOs.
What is an ICO?
For the uninitiated, an ICO is an Initial Coin Offering. Often dubbed as the IPO for cryptocurrencies, essentially it is global crowdfunding on steroids with a speculative twist.
ICOs typically involve crowdfunding an open-source blockchain platform, by pre-selling the software tokens that power the platform – usually dubbed crytpocurrencies.
Funds from all over the world in the form of cryptocurrencies support the crowdfunding. These newly formed crytpocurrencies can then usually be exchanged for Bitcoin on around 45 global cryptocurrency exchanges usually within a matter of a few days after the crowdsale has finished.
To many, this represents speculative nirvana.
Up and up
Whilst individually people will have different motivations, many view the crytpocurrency space as pure speculation. Just consider, for example, how the price of bitcoin alone in 2017 has risen from around $800 to $4500 (USD) – that’s a rise of over 500%.
Many other cryptocurrencies have also seen sharp rises in prices over the past 12 months with the Crytpcurrency market growing almost exponentially from $17bn to over $150bn since 2017, according to coinmarketcap.com.
ICOs add to this growth as new crytpocurrencies are released on to the world with the ICO – so much so that many people just “flip” ICOs.
An ICO is flipped when someone buys into an ICO during the crowdsale campaign and before it goes live on a cryptocurrency exchange.
As soon as the new crytpocurrency hits the exchanges, the flipper then sells their newly minted coins, hopefully for a profit.
This has seen many people, but not all by any means, generating a return of 3, 4,5 even 10 times their initial funds invested.
Wherever there are extraordinary returns, new money joins the game chasing those returns. This is where challenges begin to develop.
Even back in the 16th Century in the Five Hundreth Pointes of Good Husbandrie, 1573, Thomas Tusser wrote :
“A foole & his money, be soone at debate:
which after with sorow, repents him too late.”
Like the internet before it, there are those that prey on greed-fuelled eyes. Judgement can so often be seen to be lacking when FOMO (fear of missing out) is in the air.
An indication of the FOMO effect comes when you consider the headlines that so often appear in the media.
One such headline was ‘BAT tokens raised $36m in 34 seconds’.
This re-enforces FOMO when the cryptocurrency hits the exchanges. “It must be popular so I must buy when it hits the exchanges and I can make great money!” is so often heard.
This, so often, becomes the self-reinforcing cycle of greed. You can almost smell it.
FOMO is that adrenaline-fuelled drug that defies logic, especially when it comes to ICOs.
The media headlines get more extreme, cryptocurrency prices rise, and the cycle goes on. So much so, that many scammers have deliberately set about their plans to part fools from their funds.
Whilst the cryptocurrency community provides the checks and balances – often through community posts on such social media platforms as Reddit and Bitcointalk – people still get taken by scammers: fake websites, websites copied from the original bona-fide website, fake ICOs, where no technology exists, and promoting ICOs with flashy videos and websites.
Whilst the regulators have kept a watchful eye on proceedings, the numbers are getting too big to stand by and watch.
According to Coindesk’s ICO tracker, to date, ICOs have raised almost $1.8bn, with $1.6bn in 2017 alone.
Its bubble-like status is re-inforced when we consider the crytpocurrency media became excited when in June 2017 when the level of funds raised by ICOs had exceeded Venture Capital in the space for the first time.
Venture Capital injected $295m. ICOs raised $327m.
The level of funds has risen too quickly since then and action has begun to ramp up.
In come the regulators
In late July, the United State Securities and Exchange Commission sent out a warning shot across the bows about ICOs referencing the DAO crowdsale of 2106.
This was seen by the community as a sign of things to come.
A few days later, the MAS (Singapore’s Regulatory body) announced their views implying strongly the space was being watched closely – and then came what many viewed as the coup de grace.
On the 4 September 2017, China banned ICO’s with immediate effect altogether.
Citing scammers and concerns over the use of ICOs to launder money, several of the Chinese financial authorities put out a joint statement banning ICOs.
With an estimated two million Chinese investors supporting ICO’s, this took the wind out of the sails of the cryptocurrency marketplace as a whole.
Many crytpocurrencies fell between 20- 50% in a matter of hours as the news circulated globally.
This is a clear signal that the days of free-flowing FOMO is under threat.
It shows that global regulators are now taking notice that regulation is needed to protect retail investors.
They have worked out what they need to regulate and now they need to work out how.
Even that will be a major hurdle as the regulatory processes globally move slowly.
The speed of business
I was at a regulatory function on ICOs in Singapore only this week, and the formalised process of regulation was said to be at least 18 months away.
Regulation moves slowly, but the technology does not. Regulators are placed in a difficult position.
Regulation is absolutely necessary in this space and needs to be seen, but at the same time it cannot be seen to stifle innovation.
Innovation is the nationalistic testosterone that drives many economies – after all, if funds are raised (and hopefully spent) in a given jurisdiction, it will drive economic growth.
In the meantime, ICOs have become the new dot-com, and it will be interesting to see where the space finishes up.
They always say when you hear taxi drivers talking about the latest financial trend, it’s time to get out – and you may well ask how could it get any worse.
How about when you see a great cryptocurrency expert, who is so renowned for her commentary on all things intellectual and technology-based.
Yes, you’ve got it -- Paris Hilton has put her name to an ICO and is actively promoting it.
Maybe the regulators have seen a little deeper after all.
Disclosure: The author holds a portfolio of cryptocurrencies including Bitcoin referenced above.