In the world of Cryptocurrencies it seems like there is a new ICO being launched every day. Many of these ICOs are being launched as ERC20 tokens on top of the Ethereum network and are fetching millions of dollars on launch. With many of these tokens launching before a beta version is out, the value of these ICOs are purely speculative. This speculation leads me to believe we are in the making for another Dot-com bubble.
I should mention that I don’t believe that the entire market is a bubble as there are many coins that have tangible services and value already. Bitcoin, the pioneer of cryptocurrencies, has shown itself to be the leader in storage of value with real potential ahead in the coming years for transactions with the new Segwit update. Ethereum has also shown itself to have tangible value with it having so many developers building on top of the network. With these two cryptocurrencies maintaining nearly 60 billion in market cap at the time of writing, it begs the questions why are people willing to invest so heavily in these compared to other promising projects?
From my point of view, I see name recognition as an important factor in Ethereum and Bitcoin dominance. When a person first looks to invest in cryptocurrencies they often are looking into the markets because of a raving news article that is more than likely about either Ethereum or Bitcoin.
When I dig deeper into the tangible value I begin to see some common properties of these tokens that I don’t see in many other tokens. First off, both Bitcoin and Ethereum have identifiable success and have been the main innovative projects in the market which provides value. They also both have transactional value which is helping to increase the value over time as more people look to use the tokens. They also both have a property that I call economic equilibrium which means that the token has tangible value to all involved parties therefore increasing the demand and flow of the tokens.
One of the concerns I see with many tokens that are being launched as ICOs is that they do not have economic equilibrium. Therefore, the value of the token won’t increase because there isn’t a matching demand and supply on both sides of the sale of a token. For example, the Basic Attention Token (BAT) launched and fetched a whopping 35 million in funding for its ICO launch. This is an impressive feat and well deserved considering the issues this project addresses. However, the BAT doesn’t achieve economic equilibrium because the flow of the token is one sided towards the users and the publishers. In other words, because there is little economic incentive to purchase the BAT from the users and publishers the users and publishers will end up with an excess of the token and no one willing to purchase them because they don’t have a way to spend them. With BAT this problem is easily solved by having advertisers purchase advertising on the platform with BATs, but with other projects this may not be as easily solved.
It is my opinion that one of the main differences that separates a successful project from an unsuccessful project in the cryptocurrency market is the ability to achieve economic equilibrium. Therefore it is important for developers to make certain they have created a feedback loop for the transactions of their tokens. Investors should also closely consider the property of economic equilibrium the next time they are considering investing in an ICO.