When Vitalik Buterin, the co-founder of Ethereum, has something to say about cryptocurrency or ‘token’ startups, it’s worth listening hard. He’s still only in his early twenties, but is indisputably one of the major experts in the cryptocurrency field, with probably a greater understanding of how digital currency can work from creation to launch than anyone else in the field. In short, if it’s worth knowing, he probably thought it up in the first place.
Delivering the keynote speech at ETHWaterloo in Canada in October 2017, he stated his belief that nine out of ten token startups would fail. Mentioning the quantity of bad ideas – and scams – dotted in amongst the good ideas when it comes to creating new cryptocurrencies shouldn’t be taken as any kind of rejection of digital payment systems, however, as around 90% of startups in any sector fail. If anything, it’s positively encouraging that cryptocurrencies are no different!
The other positive as far as Buterin is concerned is that the first wave of failures will mean that the currencies that emerge in the next year or so will be better as a result; after all, there’s nothing like learning from mistakes. However, his core concern is worth noting – the sheer quantity of ICOs (or initial coin offerings) in itself could be damaging.
Like their kissing cousin, the IPO (or initial public offering), the ICO can raise a lot of money from investors in a short space of time, and in the case of cryptocurrency, can raise a lot of money from investors in a short space of time for something that doesn’t exist, and might not work even when it does. And when we say ‘a lot of money’, we mean millions of dollars.
Buterin isn’t the only ICO sceptic; the SEC (Securities and Exchange Commission) in the US have stated that they will be putting even closer regulations in place for ICOs, and Chinese regulators have effectively banned them altogether, even though this move is likely to be a temporary restriction rather than a permanent ban. The language used in their statement is also interesting, suggesting they can cause serious disruption to “the economic and financial order”. Although there’s no suggestion that other national regulators might step in and do the same, there’s also no guarantee that they won’t.
So what’s the deal? Who is right? Buterin, the Chinese regulator, neither or them, or a combination of all of the above? The answer is almost certainly the last of these. An IPO might be the ‘legitimate’ cousin, but scams aren’t exactly unheard of, and even genuine offerings can fail, with investors losing everything they invested. The key, as with all investments – and certainly anything to do with cryptocurrency – is caution. Investment can be exciting, but it’s a leap in the dark; if you can’t afford to lose it, don’t part with it in the first place.