If you’re trying to wrap your head around Initial Coin Offerings
(ICO), you’re not alone.
While debate rages around whether major cryptocurrencies such as
Bitcoin and Ethereum are in a bubble, there are also new ICOs
being created every day.
One could argue that the ICO craze reached its zenith last Monday
when Burger King in Russia launched a “whoppercoin“.
The coin can be obtained via the purchase of Whoppers at Russian
Burger King restaurants, although it’s also been described as a
glorified loyalty points program.
While that may the case, the introduction of new ICOs continues
to proliferate. The sharp rise this year is primarily due to the
widespread use of the Ethereum
blockchain, which provides a simpler coding platform than
Bitcoin for launching a new digital currency.
At the time of writing, coinmarketcap.com listed 848
different cryptocurrencies with a circulation of digital coins in
supply, and a market capitalisation shown in US dollars.
A market cap is calculated by multiplying the number of coins in
supply by the individual value of each coin.
That figure is typically shown in US dollars, but for each new
ICO it’s not actually traditional fiat currencies that are used
to buy the coins.
Instead, the price action is driven by a transfer of funds from
other cryptocurrencies — also known as a coin swap.
Julian Hosp, the co-founder of cryptocurrency platform TenX
(which also has a digital coin of its own), told Business Insider
that there are significant doubts around the legal framework for
“If you accept fiat you’re probably going to get into big
trouble. You should only be accepting other cryptocurrencies, do
a coin swap,” Hosp said.
“We give talks, presentations and workshops on the proper
standards from a legal and marketing perspective. One of the key
things is – never accept fiat money.”
“Accepting fiat currency during an ICO could easily be seen as
selling a marketable security. Compared to accepting digital
currencies, it’s very different from a legal perspective.”
So in effect, for each new ICO the coin’s value is driven higher
via the transfer of bigger cryptocurrencies — namely Bitcoin and
However, the value of an established cryptocurrency such as
Bitcoin is still expressed in US dollar terms.
And presumably, at least some of Bitcoin’s current value is
derived from its capacity to be converted into USD, given that
right now it has very limited use as a means of exchange. In
other words, very few outlets around the world accept digital
currencies to pay for goods and services.
Advocates for digital currency argue that will change, but the
broader use of cryptocurrency in day-to-day
still require a buildup of trust from consumers.
So that raises questions around what the US dollar-based market
cap of each new ICO actually represents, given the lack of a
legal and regulatory framework for accepting fiat currency.
“I personally am very bearish on ICOs,” Hosp said. “I’m very wary
and cautious because I think at the moment they are misused, and
it can be very dangerous.”
Regulatory develoments for cryptocurrencies are still in their
early stages. And so far, regulatory measures seem to be focused
on Bitcoin, not the hundreds of other digital currencies.
Earlier this year, the US Securities and Exchange Commission
rejected an application for a Bitcoin Exchange Trade Fund (ETF).
But interestingly, the SEC said that it would leave the door open
for approving an ETF if there was a regulated market for trading
Enter the US Commodity Futures Trading Commission (CFTC), which
in late July ruled
in favour of the first regulated exchange
and clearing house for the trading of futures contracts between
Bitcoin and US dollars.
Last week, major global banks announced a partnership to develop
a digital coin using blockchain, with the aim of speeding
transaction and settlement times. The project will be carried out
in conjunction with lawmakers and
the first roll-out not scheduled for more than a year.
For now, experienced financial analysts such as Con Michalakis,
the chief investment officer at Statewide Superannuation, say
that the market for cryptocurrencies looks more like a bubble.
“It certainly has the characteristics of past bubbles,”
Michalakis said. “It’s like the dot.com era, when every asset is
going up by association.”
“Cryptocurrency started around the idea that you can move
payments around quickly, but now it seems like it has become a
That’s one way to describe the explosion of ICOs in the digital
currency space. As new regulatory measures are introduced and the
market continues to mature, time well tell whether each new
digital coin will be able to maintain their current market
capitalisation in US dollars.