Initial Coin Offering (ICO) bubble? - Lazy Investing Way

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Monday, July 17, 2017

Initial Coin Offering (ICO) bubble?



There’s a lot of buzz online about the various cryptocurrencies popping up lately. And this event is being cause by the ICO or the Initial Coin Offering, which is similar to the IPO – Initial Public Offerings in the stock market.

What is an ICO? It is not a security, at least not one that resembles any security that existed more than 5 years ago. I suppose you could call them commodities that are purchased overwhelmingly for speculative reasons to say the least.

These ICOs are based off of Ethereum. Ethereum is a blockchain protocol very similar to Bitcoin, but unlike Bitcoin it supports sophisticated forms of transactions known as smart contracts. These are simple programs that define when, how, and in what manner ETH (the name of the native token on the Ethereum network) is distributed. This flexibility allows one to create new tokens on top of the Ethereum platform very easily. And it is these tokens or “coins” that are being speculated on in this bubble.

These coins are sold as vital parts of as-yet-undeployed decentralized mechanisms which are “expected” to be useful at some point in the future, and their tokens are claimed to extract rent or value from the people who will use these services.

As an Industrial Engineer, Financial Planner and also as someone working in the IT-BPM industry, I’m a fan of these concepts and it’s potential in the future. But the current scenario is that people are thinking of these as ‘investment’ while they are obviously not. Although it is true that you can make money out of it, but speculation often leads to a lot of wealth lost or gained, that makes it no different from gambling really.

This isn’t anything new and in the stock market, stocks that play float manipulation games generally become juicy targets for short-sellers.The world is filled with people who know the price of everything but the value of nothing.

I've researched these coins to some extent and I think BTC, LTC, ETC (Ethereum Classic) all have great use and functional cases. Ethereum and all of the ICO ponzis built on top of it are useless.

Let’s consider the ICO process:

Suppose I make a new coin called Awesome Coin. I pre-mine all of the coins at a cap of 100,000,000 coins and at the initial offering only make 10 coins available. Then like IPOs, I create a marketing campaign and create a sort of demand to get enough people to throw money into it through a trading platform. After that I start selling 1 of the coins for $10. Awesome Coin will now have a $1 Billion market cap. The next coin, I sell for $11 and now Awesome Coin becomes a $1.1 Billion market cap. Then let the perceived demand and supply kick-in (heck let greed kick-in); repeat the scenario at varying prices.

The people who created the ICO earns money guaranteed. The folks running the trading platform is also guaranteed to make money so long as the trading activities continue. But the individual hyped investors or traders? They are at the mercy of the hype.

Remember, in the world of speculation, you are not valuing something so much as you are speculating on the perception of value.

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The writeris an RFP® - registered financial planner and helps people through CERTA, Inc.’s financial education programs (www.certa.ph).He is also a Real Estate Broker, author of the award-winning personal blog – www.vernongo.com and an Instagram travel-micro-blogger (@PhantomNomad).
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Originally Published in Philstar - The Freeman Newspaper last July 4, 2017.

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