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The flood of cryptocurrency ICOs are an echo of the dotcom boom

All market extremes are driven by one of two emotions – fear or greed – and it would appear the world of the cryptocurrencies is now firmly in the grip of the latter

24/10/2017

Andrew Williams

Andrew Williams

Investment Specialist, Equity Value

If Harry Redknapp’s call to “get involved” in cryptocurrencies was not enough to give you pause for thought, how about a warning from the actual ‘Wolf of Wall Street’?

According to this Financial Times article, the movie’s subject Jordan Belfort has dismissed initial coin offerings (ICOs) as “the biggest scam ever” and bound to “blow up in people’s faces”.

ICOs were recently the subject of a withering piece in The Economist, the tone of which was set by its headline: Initial coin offering means investor caution obligatory.

It proceeded: “Here is the deal. You can buy an entry in a computer ledger issued by a start-up company on the basis of an unregulated prospectus. But though the ledger entry is called a coin, you cannot spend it in any shop.”

As the article goes on to point out, the use of the term ICO makes things sound comfortably similar to an IPO, which is the abbreviation for ‘initial public offering’ – the heavily regulated process through which a company lists on the stockmarket.

Unlike an IPO, however, an ICO does not necessarily offer participants any equity in the company concerned.

Dotcom boom repeated?

Not that that has prevented people rushing to back these ventures with a fervour that carries more than a whiff of the dotcom boom of 1999/2000.

That Financial Times piece, for example, quotes Coinschedule.com data indicating that, so far this year, a total of 202 ICOs have raised some $3bn (£2.28bn) while The Economist flags up a website called ‘ICO alert’ that “covers 31 pages of A4 paper and includes around 600 companies”.

It goes on to argue that, in many cases, “an ICO is just a way of raising capital without all the hassle of meeting regulatory requirements or the burden of paying interest to a bank. Businesses are able to achieve this feat because investors hope that the coins will rise rapidly in value, as has been the case with bitcoin or ethereum, the best-known digital currencies, which have seen stellar gains in the past year”.

All market extremes are driven by one of two emotions – fear or greed – and it would appear the world of the cryptocurrencies and ICOs is now firmly in the grip of the latter.

We were going to end with a line from The Wolf of Wall Street on the subject of risk or greed or speculation but they were all a shade too blue for The Value Perspective.

So we will instead sign off with this rather more eloquent observation from The Economist: “Nothing makes individuals more willing to take risks than the sight of other people getting rich.”

Author

Andrew Williams

Andrew Williams

Investment Specialist, Equity Value

I joined Schroders in 2010 as part of the Investment Communications team focusing on UK equities. In 2014 I moved across to the Value Investment team. Prior to joining Schroders I was an analyst at an independent capital markets research firm. 

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