The ICO Markets Explained
This action in the crypto space can only be described as absolute lunacy. On one side, these currencies are becoming more and more recognized, leading to the presumption that they will increase in value perpetually, and hence, are currently going ape-shit to the upside. On the other hand, that thesis really doesn’t make sense if you think about it, as it contradicts the laws of monetary supply.
If you look at the ICO market, there are an abundance of interesting ventures, teeming with potential. In a way this is interesting to investors, seeing that the IPO market has been long ago cornered by greedy venture capitalists, fixing to make a quick buck and move on, like a swarm of locusts. The biggest issue for me, and the main difference between the ICO and IPO markets, are that ICOs are not regulated. In other words, anyone with an idea can raise funds via an ICO, conducted completely in an online environment, without ever going through the vigorous due diligence process inherent with stock market IPOs. Technically speaking, people could make shit up on their whitepaper – the equivalent of an IPO prospectus, and it would be very difficult to verify it by a third party at arms length.
Furthermore, you are not actually buying a piece of the company in an ICO. Rather, you buy into the tokens, aka the currency in circulation in that ‘economy’. In other words, you are betting that the ‘economy’ you are investing in will someday be of value, and people will want to own the currency to participate in it. Understanding that, you cannot apply traditional metrics of due diligence to a crypto-based company the same way you do in investing in company stock. Owning stock, you are buying ownership of a company. Buying a crypto token, you are buying into the underlying economy, posing as a company. Similar goals, but not the same.
Whether or not this is feasible in the long term is still up for debate. The fundamental argument for blockchains is essentially to decentralize everything, meaning there are no owners or governing bodies, invalidating the need for shareholders. Blockchain economies are regulated by the people, for the people. Democracy in its purest form.
Having said that, an important factor to consider in buying into an ICO, a factor nonexistent in stocks, is the form of monetary policy implemented with regards to the crypto. WAVES for instance, is interesting to me, because they have a fixed circulation of currency – set at 100,000,000 waves. This creates an environment where, if their economy were to grow, would see an increase in demand for their currency over a long-term time frame as their supply remains the same. Ethereum, on the other hand, exists in a inflationary environment, as more currency is constantly being issued into circulation – a different system of governance altogether.
At this point in time it doesn’t really matter, since the ICO market, like all markets, is emotionally driven. People buy cryptos because their friends are buying, and once they are done buying they buy some more. Just 3 days ago, I was talking to a friend who bought the Cardano ICO at $0.02. He invested $8,000, which ballooned to an impressive $300k value at the time we spoke. Since then, a mere 2 days later, that crypto is up another 68%, putting the value of his holdings to north of $500k. What does he know about the Cardano blockchain? Not a damn thing.
This kind of parabolic growth doesn’t make sense on any level. Not in a company, let alone an economy – which is what crypto-based companies are. One thing that does make sense however, and perhaps the most compelling argument supporting ICOs, are the fact that operators are motivated to ICO at a lower coin value than a higher one, as their idea is merely proof of concept. IPOs on the other hand, are incentivized to fetch the highest price possible, since that’s how VCs make exits and investment bankers take fees. The ultimate money machine for a select few.
What puzzles me about ICOs is the concept that cryptocurrencies were never designed to be assets to be actively traded and fluctuate so drastically on the short term time frame. Cryptocurrencies were merely a ‘pass’ to utilize the blockchain, and a way of sorts to incentivize participants to secure the network. On that token, if a crypto were to get too expensive too quickly, it would discourage users from that blockchain, as the costs of security would exceed its value.
If the blockchain that a cryptocurrency was built on, expanded and created so much value for its users over time that people wanted to participate, creating demand and increasing the crypto price, that I would understand. It would not have ‘bubble’ like characteristics and would simply be functioning as an economy should, subject to the laws of supply and demand. But at this point, seeing 10,000% moves for proof of concept cryptocurrencies being minted out on a regular basis, something is clearly aloof.
I have never been a person to discourage acts of wanton speculation, I love the game and understand the game. I would rather take the easy win than chastise the risks that others take. However, the sands are slowly shifting and it won’t be long before the shit is sifted through and separated from quality blockchains. To say the entire crypto space is a bubble is ignorant, but to think they will all go up in tandem is just as naive. When the music stops, and it assuredly will, you don’t want to be left holding a bag of feces composed of crypto-jargon chicanery that made no sense from the get-go.