
Why is value flowing to ICOs? It's diversification of Bitcoin - jwilliams
https://jonathannen.com/speculation-diversification.html
======
factsaresacred
Given that a bearish Bitcoin market sinks all cryptocurrency ships there's not
a whole lot in the way of diversification benefit right now.

ICOs appear to be more like Kickstarter with tokens. Some are in it for
speculation and possible wealth, others _really_ like the underlying
product/game/app.*

For example, French indie game 'Beyond the void' is integrated with an
Ethereum blockchain. People fund the dev and receive tokens to use in the
game. "Investors" win when the game is live. That their token can be changed
for other currencies is secondary.

People will get burned. Just see the scammy ICO ads on your Facebook feed. As
with Kickstarter (with its 21% tech project success rate), diligence is
required.

But that any one of us can relatively easily exchange objects of value across
hundreds of different projects is just about revolutionary.

* Currencies like Monero and Litecoin are more truly speculative in that their value rests solely in perceived future utility and adoption.

~~~
psyc
It's a mixed bag of legit projects, outright scams, and that grey-area of
tech-bro charlatans. It's the last one that concerns me:

CEO - Serial Blockchain Entrepreneur. In this for the long haul!

CTO - "Crypto expert" == Business guy who understands blockchain superficially

CFO - This guy is real, of course.

Working code! = Fork

Whitepaper = Buzzword language that just says their going to tokenize
something. 'LegitCoin will tokenize the derivatives market for solar!'

Create positive pump articles and videos for us for free tokens!

My non-technical brother in law asks me every other day to look into one of
these turds for him, and I have to deflate his bubble.

~~~
factsaresacred
Spot on. Shitcoins, as they call them.

At this very early stage of adoption, most people who are smart enough to
figure out how to trade crypto should be smart enough to do some research
before buying 1000 vaporware coins.

As the doors open to the wider population, though, it's inevitable that
hucksters will try to separate regular folk from their hard earned cash.

The notion is reprehensible (and goes against the spirit of cryptocurrencies)
so some regulation around accountability would not be unwelcome.

------
free_everybody
... or maybe ICO's are clever ways of extorting even more money from naive
cryptocurrency day traders?

~~~
QAPereo
It's probably also a dream come true for anyone who wants to launder some
money.

~~~
pmorici
How do you figure? I think the general wisdom among people who have a deep
understanding of block-chains is that it is about the worst way you could
possibly try to launder money. Every transaction you make is forever
immortalized in a publicly accessible record book. Not to mention that there
is strong KYC at the entry exit points between cash and crypto currencies.

~~~
QAPereo
And yet hackers steal these coins and seem to do alright, Tumblers seem to
anonymize currency too.

~~~
pmorici
Do you have any stats on the percentage of traditional financial crimes that
go unsolved vs the percentage of crypto-currency crimes that go unsolved? You
would have a hard time finding a major crypto-currency heist, dark market, or
rogue exchange that hasn't been tracked down and shut down.

~~~
darawk
Yes but cryptocurrency thieves (i.e. exchange hackers, etc) are currently
batting around 100% uncaught, afaik.

~~~
pmorici
[https://davidgerard.co.uk/blockchain/2017/09/17/kim-
nilsson-...](https://davidgerard.co.uk/blockchain/2017/09/17/kim-nilsson-of-
wizsec-how-the-bitcoins-were-stolen-from-mt-gox/)

Pretty sure they got the guy behind a lot of the thefts when they arrested
that BTC-e guy earlier this year.

------
polemic
> "One of the fundamentals of markets is that value needs to go to work."

Indeed. And since there is little real (read: economically useful) work that
Bitcoin can actually do, speculators pile them into other types of coin that
are, at best, an additional level of indirection between Bitcoin and real
value.

Hm, creating complicated financial derivatives to hide the underlying non-
viability of the core product. Now why does that sound familiar.

~~~
pjmorris
Next thing you know, someone will be making $500,000 ICO loans to retail
workers, and selling on the loans to be bundled into AAA-rated
securitizations. I wonder if Moody's rates ICO's?

~~~
alexasmyths
... and developers will be paid in 'coins', issued by the company.

"Join my startup, your salary is 100 Million Kangaroo coins per year. We call
them 'ru-bucks' because we're cool like that."

~~~
im3w1l
Many devs people get part of their compensation in stock grants. For stocks
that pay no dividend.

~~~
jacquesm
In most cases the difference between stock in a start-up and Ru-bucks is
negligible.

~~~
alexasmyths
I will admit that in many cases, especially if the company does not do well,
stocks = ru-bucks.

But if a company does well, stocks >>> ru-bucks.

Or at least they should ...

Sadly, I actually believe my little satire will become reality very soon, as I
believe coins will be handed out as comp ... I'll bet a Kik, very soon.

~~~
Waterluvian
And if people accept that as payment, what does it mean? Too many tech grads?
Too few tech jobs?

~~~
1337biz
The obvious answer is of cause: we need more visas for developers

------
sonink
The author might be missing the woods for the trees. ICO's are at heart a
rethink on the angel-vc-ipo funding cycle. ICO's offer very clear advantages
in terms of increasing distribution, decreasing friction, aligning investors
to product success and builds upon emerging ideas around equity/control
structuring.

That they offer a diversification of bitcoin is merely an oversight in the
grand scheme of things.

~~~
alexasmyths
The most important advantages to ICO issuers are: lack of transparency,
reporting requirements, no dilution, no oversight, the ability to 'print
coins' as they please. In other words, absolute power over the speculators
that buy them.

I'm not sure if I want to be on the other end of that deal ...

~~~
coconutrandom
This is mostly inaccurate, the code behind the token creation and distribution
is public. And while it's technically possible, in practice most token
contracts do not give the creators the ability to mint to tokens on a whim.

~~~
alexasmyths
Yes, 'technologically', sure.

However, as we see with stocks, there's nothing stopping an entity from doing
whatever they please in the end.

Like issuing a second set of coins, at par or equal value to the 'current
coins'. Possibly requiring that the first tranche be redeemed for the second.

Or whatever shenanigans they want.

With the Kik ICO, they've kept a huge flood of coins to do with as they
please. And they will in fact do _whatever_ they please with them.

For these 'company managed' coins, I think they serve as a de-facto 'central
bank'. They'll find a way to change the rules if they choose to.

~~~
woah
Your connection between developers keeping a large portion of the coins, and
being able to "change the rules" doesn't make any sense. Developers keeping
coins is actually very positive, and if I were to buy into an ICO, I would
greatly prefer this. Otherwise the developers have no incentive to keep
working hard and meeting milestones, since they already have more cash than
they would be able to increase the value of their holdings by.

~~~
alexasmyths
The coins are worthless.

And the companies can make them more worthless at any time by changing the
rules. Which they will, if they can get away with it.

------
127
The dream of getting rich quick is what is driving most of ICOs, if not all.
There's no rhyme or reason to it. People just want to 100x their money quickly
as possible and see ICOs as their chance. It's basically gambling, but lately
much better returns than the casinos.

~~~
sp4ke
Tell me how is this objectively different than VCs ? Other than it's now
available to everyone instead reserved to the elite ?

In both cases, you are well aware most of your investments will fail and
you're expecting one 10x or 100x that will make it up for other losses . aka
gambling ...

~~~
rocqua
With VCs, there is reason to believe that the expected value of your total
investments is positive. With ICOs, the claim is that many people mean to cash
out by selling before the bubble bursts.

~~~
sp4ke
>>> there is reason to believe that the expected value of your total
investments is positive

Hmm, I wonder if the zero interest rate "trickle down" free money that is
keeping stocks artificially inflated has anything to do with this assumption ?

>>> With ICOs, the claim is that many people mean to cash out by selling
before the bubble bursts.

Yeah totally not the same as founders rushing to growth with bullshit things
like "growth hacking", then rushing to exit to cashout before everyone
realizing their business is not actually solving a real problem. ( like all
the messenger apps/chat bot frenzy of last year)

------
ringaroundthetx
The M1 money supply in any currency is always a tiny fraction of the money
supply in comparison to the M2, M3, and MB, which are illiquid and used for
speculation.

It isn't mysterious that this is also the result in cryptocurrency as well.

An oft parroted rebuttal is that bitcoin is being used for speculation and
very little is being used for purchases of goods and services, even though
that fits the same behavior of national currencies it is used to discredit
bitcoin's use as a currency.

It looks like it is growing the way one would expect.

~~~
JumpCrisscross
> _An oft parroted rebuttal is that bitcoin is being used for speculation and
> very little is being used for purchases of goods and services, even though
> that fits the same behavior of national currencies_

Are you asserting that a sizeable fraction of U.S. dollar M3 or even M2 is
sitting idle speculating on the future value of the U.S. dollar?

Rates are built into modern currencies in a way they were not for gold. That's
Bitcoin's fundamental problem. It's a 19th-century currency relearning old
economics.

~~~
ringaroundthetx
> Are you asserting that a sizeable fraction of U.S. dollar M3 or even M2 is
> sitting idle speculating on the future value of the U.S. dollar?

No. But that also happens whether it is inadvertently just sitting there, or
in bonds as part of a massive carry trade

Secondly did you read the article? It is about sizeable portions of bitcoin
being used to invest in ICOs, which I was agreeing with and pointing out how
otherwise illiquid portions of national currencies are used this way as well

~~~
JumpCrisscross
> _that also happens whether it is inadvertently just sitting there, or in
> bonds_

Bonds fund useful activity. Most ICOs have yet to finance a single developer's
salary.

~~~
acty1
District0x is paying salaries like that and many others.

The point the parent was making is that the money IS SITTING there. And bonds
are not M0.... you are proving his point.

Anyone holding USD in a deposit account or loaned it out is speculating that
the value of USD will remain almost the same (willing to lose 2% to
inflation).

Of course someone holding a currency expects value to hold or go up.
Unfortunately value of USD and other fiat goes down at exponential rate and by
end of century will be practically worthless.

Imagine paper bills in year 2100. No?

Then you can imagine USA will digitize it's currency on some Blockchain of
their own(this is a no brainer).

Now imagine THE Fed changing interest rates (aka Coin Emission Rate) as they
please.

Pretty soon people will diversify their currency holdings away from a single
country/government that can change emission (interest) rate at will and has
onerous reporting and surveillance requirements.

Logical conclusion is a supra/trans-national global currency something Bitcoin
or Monero.

"Granpa, was it true that when you were young you used to get paid in tree
cotton papers?"

~~~
danblick
I think you are conflating "blockchain" with "electronic payment". I can use
my Visa card without needing a blockchain. And banks will settle the payment
electronically without ever moving paper money.

"No Timmy, I was not paid with paper money even in the 1990s."

------
RichardHeart
That's roughly 100 percent price correlated. tether, iota, emercoin and few
others aren't as correlated. Not a good diversification when they all go up
and down together. (If you're diversifying to reduce risk.)

~~~
cperciva
Depends what type of risk you're trying to reduce. Trying to reduce the risk
of prices dropping? Not very useful. Trying to reduce the risk of them turning
out to be scams? If you diversify enough you might end up with one which
isn't.

------
jondubois
It's more than that; it's to provide additional capacity to the cryptocurrency
'inter-net'.

A single blockchain cannot physically scale beyond a certain number of
transactions (based on Amdahl's law), but the amount of value that passes
through a single network can in fact keep going up indefinitely (e.g. when the
price of the coin goes up, the value of transactions go up, even though the
actual number of transactions stay the same) - But the flat transaction fees
become prohibitively high and only suitable for large transactions; that's why
you need new networks with lower-priced coins and fees to handle the load of
smaller transactions.

------
gorm
Diversification is supposed to be done in different asset classes. Also a good
rule is to only diversify when the asset is cheap.

~~~
sygma
Even better: diversification should be done across weakly-correlated (ideally
negatively correlated) assets.

------
tryingagainbro
also, IMO, quite a few think of it as lottery money. Maybe they mined it early
or bought in very cheap, now they have a lot of money. So what do you do when
you get a bunch of money almost all of the sudden?

------
l33ty
Ethereum tokens are apps,basically, they are not even a currency... And some
ICOs nowadays raise money to tokenify real world finance, look up genesis
vision

------
paulpauper
But they are not. Altcoin value relative to Bitcoin peaked in june 2017

~~~
paulgb
That characterization doesn't really tell the whole story though. By my
reading of this chart[1] altcoins went from ~15% of the total market cap to
~62% before falling to ~52%. That's still a lot more of the value in altcoins
than at the beginning of the year.

1: [https://coinmarketcap.com/charts/#dominance-
percentage](https://coinmarketcap.com/charts/#dominance-percentage)

