Why ICOs look like bubbles?


This is the fourth post in the series of blog posts which aims to debunk popular myths and provide logical counterarguments to some of the most common misconceptions about cryptocurrencies.You can read the previous posts here.

Popular Belief: “Bitcoin does have a killer application – store of value. But all these so-called utility tokens issued via ICOs are unregulated scams. ICOs are a crazy bubble.”


This is a very popular perspective particularly amongst folks who started out as Bitcoin sceptics. They have been somewhat reluctantly forced to concede that Bitcoin is not going away and is there to stay. This perspective involves acknowledging that Bitcoin is meeting a previously unmet market need pretty well that of a decentralized, immutable store of value beyond manipulation by motivated 3rd parties, whilst projecting the emerging token economy based on the technology behind Bitcoin as a bubble of over-exuberance and frothiness. A key component hereof is the assertion that ICOs are largely the creation of scamsters and opportunists taking advantage of regulatory uncertainty and the gullibility of anonymous retail investors who do not
have the expertise to value early stage technology projects.

To understand why this objection is false, let us try and unpack what makes tokens unique and differentiated. One of the main reasons why tokens attract skepticism at a conceptual level is that they combine a number of related and yet disparate elements that we are unaccustomed to seeing integrated within the same object or system. A token is akin to a subscription fee that provides access to the unique distributed data network that is the blockchain.

The data within each public blockchain network is structured to provide a specific service or application. If that service or application creates value, then the blockchain network has value. If the blockchain network has value, then the subscription that provides access to same network has value. If the subsription has value, then the token has value. As blockchains are able to eliminate token double spending by design, it is easy to see from this framework how tokens should increase and decrease in value in proportion to the end utility provided by their underlying blockchain networks.

As such, a token is a type of subscription needed to access and utilize shared, open tech infrastructure, and a fractional albeit non-dilutive ownership unit in the underlying technology network at the same time. A token, thus, unifies and collapses within itself a whole host of different activities and modalities such as funding, technology access, product deployment, distribution and monetization that previously needed to be operated as distinct layers within companies expressly incorporated for that purpose,with the overheads that involve.

What is important to understand is that tokens represent a breakthrough in the way that open, tech networks are funded, deployed, monetized and distributed. While some tokens are currently overvalued, they are overvalued because the networks to which they provide access are not solving an important, technical problem that is valued by the market. Not because the underlying technical framework and methodology behind the token economy is flawed or compromised. In fact, the valuation framework for the new emerging token asset class is evolving at a rapid pace and will mature over the next few years as robust, predictive models incorporating key network valuation techniques such as Metcalfe’s law will be developed to help market participants better understand whether and how a given blockchain network is providing value.This will help to compute the expected value of the underlying token with greater accuracy.

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