I made the mistake of reading countless articles about Blockchain and Bitcoin. As a result, Facebook and Google tagged me as “Bitcoin Fan”. Now, whenever I am on the internet, I am surrounded by ads like “Join this amazing ICO with 34833% upside potential”. That made me suspicious, since I see striking parallels to the Dotcom bubble.
What, in fact, are ICOs?
When a new Cryptocurrency is raised, it’s called Initial Coin Offering (ICO). An ICO starts with a “whitepaper” from the startup who is issuing the new coins, explaining what the goal of the project is, how much money or other cryptocurrencies they want to collect and how long it is going. When the ICO campaign begins, people can buy the new coins in exchange for real money or other cryptocurrencies like Bitcoin. Buyers of the new currency hope that the value of the new coin will rise (to the moon).
Influencing factors of cryptocurrency prices
Demand, driven by different influencing factors, is making prices rise. One influencing factor of demand is that people believe that real value will be created by the particular firm or that the new increasingly used. The same applies for IPOs, when a firm goes public on a stock exchange: shareholders expect the company to grow. Another important driver of demand is speculation. People simply buy the coin because they expect it will rise. Since the Bitcoin price is reaching new heights every day everybody wants to participate in a new cryptocurrency, especially speculation works fine. Already in the days of the Dotcom Bubble, speculation has gained the upper hand, as everybody wanted to own a fancy internet stock, neglecting financials, business models and common sense.
Comparing an ICO to a VC case
Usually, ICOs would be great venture capital investment opportunities: A startup wants to collect money for its product. The VC would screen the team, the idea, the financials. After the due diligence, the startup will maybe get some millions. Even though the VCs spend a lot of time with screening the startups, most investments and startups fail. ICOs are different: people read the particular whitepaper (or even don’t read it at all), nod and eventually spend a crazy amount of money in the respective project. Most of the whitepapers I’ve seen were the same: neat design and lots of fancy buzzwords like ‘AI’, ‘VR’, ‘Social Network’ – but not so much substance. Take a look at Coinschedule, a page which lists upcoming ICOs. It sounds like those companies are revolutionizing the world: Decentralized investment ecosystems or service marketplaces, a whole cryptobank or a social media data oracle. And all those startups are collecting tens of millions of money, although in most cases they only offer a rough concept on a few pages (but, with nice graphics and charts!).
The problem with the ICOs
As mentioned before, I have the strong impression that speculation has gained the upper hand over common sense. Investments around twenty or thirty millions shouldn’t be based on whitepapers and buzzwords. But: As currently ICOs are extremely “en vogue” and everybody wants to participate in the “new Bitcoin”, this works very well, putting common sense in the background. Maybe some of the new cryptocurrencies will survive the next ten years, but my guess is that most of them will vanish – either in silence or with a bang. Also Bitcoins, by far the most prominent cryptocurrency, are in terms of payment still a peripheral phenomenon. Also as a store of value, cryptocurrencies are useless through their high fluctuations in value. “Flooz.com” was a trending company in times of the Dotcom boom which raised $35 million. The company offered a “currency that could be used instead of credit cards”. The problem was that, despite a $8 million advertising campaign, nobody used the currency.
What can we take away from this article?
My guess is that the “Bitcoin Bubble” will come to the same end as the Dotcom bubble: most of the cryptocurrencies and related startups will vanish, but some will stay there forever (remember: also Amazon was part of the Dotcom bubble). The underlying technology for all the cryptocurrencies, the blockchain, is incredibly clever and will probably be used in many different industries (just take a look at the 100 biggest Blockchain startups worldwide, backed by the most prominent venture capital firms). If all the shady ICO-startups will survive? I highly doubt it. So, be cautious if you are willing to invest in cryptocurrencies and double-check your decision.