The ICO Craze is Bullshit

I am calling bullshit on the ICO craze.  Was talking to someone who told me a startup with no customers and a skeleton business plan raised mid-double digits in the millions of dollars on an ICO.  They aren’t the only one.

I think that blockchain and crypto are inseparable.  You can’t have one without the other.  I think it’s powerful technology but the market valuations are over their skis.  I am bullish on it.  I am looking to invest in it-but at the right price.  I was born at night but I wasn’t born last night.

It’s easy to be bearish on new technology.  There is a fine line between being bearish on the valuations, and bearish on technology,  In 2001, the CEO of a public company told me that Johnson and Johnson, 3M and other medical companies would disband their sales forces and simply sell through online B2B exchanges.  I thought it was bunk.

By the way, they still haven’t although they have embraced a lot of technological changes to their sales forces.

Quite a few of my friends are very familiar with fin tech.  We have the gray hair and wrinkles to prove it.  We survived 1987, 1998, 2001, 2008. One remarked that ICO’s remind him of Beanie Babies.  Ty Warner got rich.  The collectors didn’t.

In January of 2001, I was on Bloomberg TV.  The anchor asked me where the NASDAQ market was going.  I had looked at a chart prior to going on television and the number 1500 looked like the base where NASDAQ started it’s almost vertical like run up.  So, I said, “I think it’s going to 1500.”  At the time it was around 5000.

Why did I think that?  There was a lot of hype in the market just like there is today.  Friends of mine were making $50/share in one day on internet stocks.  That just isn’t sustainable or realistic.  Additionally, none of the companies that were going public actually made any net profit.  On the television program, I said there was “too much gas in the market”.

Bloomberg pulled me off the air.  They sent me a nasty letter which I still have somewhere that stated I shouldn’t be making outlandish calls on television because they had professional users.  On the day that I was on television, the Fed lowered interest rates and NASDAQ went on to all-time highs before it didn’t.

There was no way to short that market.  Markets can remain irrational longer than you can remain solvent.  Even in 2008, it was terrifically hard to short the market.  The Big Short showed some people that did it. However, it took an enormous amount of capital and you had to make a deal with the devil.   The devil was on the opposite side of your trade, and the devil marked the market.  Could you sleep at night knowing that the person on the opposite side of the trade controlled your destiny and could break you?

Why did the NASDAQ topple?   You can look up lots of different opinions but I like Professor Eugene Fama’s the best.  The market received and digested new information, and reacted.  Pets.com was good until it wasn’t.

Additionally, other companies were started then that were ahead of their time. Peapod started in Chicago and went bust.  Today, there are lots and lots of Peapod look-alikes.  Technology and lifestyles caught up to the idea.

If you started an ebook company in 1995, you didn’t make it.  I think the same can be said for crypto in a lot of cases today.  The tech isn’t widely adopted enough to sustain a massive business.  But, it’s coming.

Since 2009, the market has ridden on a wave of cheap money.  Risk preferences are fully out of whack.  New generations of people have entered the adult world and haven’t experienced a true bear market.  To give you perspective, when I came of age interest rates were in the mid-double digits (13% or so). My first seat loan in 1992 was 9%.  Interest rate trades slightly older than me recall days when the interest rate futures would go limit up or down or both in the same day.

What’s the new information that will cause the ICO bubble to burst?

Maybe something like this from Moody’s Credit Outlook Sep 21, 2017:

On Sunday, the Nikkei reported that Mizuho Financial Group, Inc. (A1 stable), Japan Post Bank Co., Ltd. (A1 stable, baa1) and around 70 regional banks had formed a consortium to develop a common digital currency. The move is credit positive for the institutions because it will help them counter growing competition from global technology companies such as Alibaba Group Holding Limited and Apple Inc. The collaboration, Japan’s first involving the creation of a common digital currency platform, will accelerate the development and implementation of a digital currency on a common national platform.

 

Individuals and businesses will be able to use the proposed digital currency, tentatively called J-Coin, to make commission-free payments and remittances through smartphones and other internet-connected devices. Each unit of J-Coin will be worth 1 yen. Mobile payment services from Alibaba and Apple hold huge potential, so efforts like the J-Coin project are critical for banks to remain competitive in payment services. Another key benefit of offering a new digital payment instrument is that it will enable the collection of customer transaction data that can be used for other business purposes, such as marketing.