Why The ICO "Bubble" Will Never Burst, Like The "Dot Com Bubble". It Will Just Slowly Adjust
While putting together the information I have now about the ongoing (and upcoming) ICOs I'm interested in, it just dawned upon me: we're not in a bubble similar to the "Dot Com" one. We're not even in a bubble.
Let me explain.
IPO versus ICO
The Dot Com Bubble was inflated by venture funds. Meaning there was a limited number of money sources. Probably a few dozens of big venture funds, managing a few hundreds of billions.
The investment frenzy was really high at that time. Almost like the ICO frenzy these days.
You could literally raise money - significant money - with just a power point and a barely working, proof of concept, website.
Of course, the investors wanted returns. So they diversified their portfolio, meaning they began to invest in more and more startups, less and less valuable. To keep their income prospects high, they started to over-evaluate everything.
And when the yearly revenue reports for those startups poured in, the reality hit. The over-evaluation was obvious and the lack of sustainability of the entire investment wave washed away dozens of billions.
Well, ICOs are different. They are still a vehicle for funding a startup, but here's how they are different from IPOs.
1. The Fund Sources Are Way More Distributed
In the IPO case, there were just a few dozens of venture funds, managing together a huge amount of money. The income sources for ICOs are way, way more distributed. I estimate there are hundreds of thousands of people investing relatively small amounts of funds. It means that in the eventuality of a hard landing of a startup, the loss will be way more distributed.
2. The "Investments" Are Already Tradeable
It means that ICO tokens are already hitting the exchanges before the company actually launches a product. Some may argue this is a problem, and, to some extent, I agree. Allegedly, with the implementation of SAFT, and other investment best practices, this will be a thing of the past. But the good thing about this is that the perceived value of a company changes in real time, lowering the impact of a hard landing.
3. The Leverage Formed By 1 and 2
Let's look at the above differences:
- way more people, investing smaller amounts of funds
- dynamically adjusting the value of a startup, by discovering the price of the baking tokens in real time, via public exchanges
That means to me we're not heading toward a hard landing.
Soon the ICOs will dramatically lower their ROI, but I think this will be done in a smoother curve and with less of an impact. If some of the initial investors can see 100x returns of their investments now, we will probably measure these returns in under 10%, in the next 3-5 years. And, naturally, this will lower the appetite for investment. The tipping point will be when the marketing cost for an ICO will be higher than the return.
Circle closed.
And the fundamental ingredient of this resilience, of this dynamic adjustment, is based on such a simple, yet mind boggling thing; decentralization.
Thoughts?
I'm a serial entrepreneur, blogger and ultrarunner. You can find me mainly on my blog at Dragos Roua where I write about productivity, business, relationships and running. Here on Steemit you may stay updated by following me @dragosroua.
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Yep, you are making some very important distinctions. In my opinion while some ICOs might fail and burst, the whole segment will not. Sure, there will be many tokens and coins that will slowly go out of favor, but there will always be gainers and ones keeping stable.
One example is STEEM which is going to keep providing utility and thus justifying its price not just through the means of speculation.
Couldn't agree more with that :)
This is an interesting idea. It sounds plausible that we'll have more of a "soft landing" than a "pop" with some ICOs, the ones that are honestly trying but not succeeding.
On the flip side, some highly valued ICOs are actual scams (FirstCoin is a current example) - these, I think, are bound to crash to zero in spectacular fashion.
Excellent points, its just one of the beautiful perks of decentralization, it takes risk and profits out of an inner circle and spreads it so evenly that everyone has a share of the risk and the profit based on their individual input.
When a small group of people/investors are spreading themselves all over the market without due considerations like it happened with the dot com bubble, there's bound to be adverse effects. Those adverse effects can be brought to the least minimum by decentralization(there's always an atom of risk no matter how small).
Guess who the "king of decentralization is"?.... Blockchain Technology, father of cryptocurrencies
Thanks for the beautiful piece
I think if some tokens fail spectacularly and with a lot of media coverage of people loosing money it could cause a crash in the market by people getting scared and pulling out.
icos are a better option, in my unprofessional opinion, then ipos because theres less red tape...for now anyway.