Are ICOs Just Another Version of Tulip Mania? Here’s Why Investors Should Educate Themselves

Back in the 1600s, during the Dutch Golden Age, tulip flower bulbs skyrocketed in price — and then plummeted in 1637. According to economists, this is the first example of a “bubble,” where the price of a product becomes aggressively inflated off pure speculation, only to reach a peak and then dramatically collapse.

The term “tulip mania” can be applied to what is happening today in the cryptocurrency space, and specifically how blockchain startups are raising obscene amounts of capital through ICOs — Initial Coin Offerings.

It’s said that during “tulip mania” in 1637, tulip bulbs sold for 10 times the annual income of a skilled craftsman — and if you look at Bitcoin’s price alone over the past year, 365 days ago it was trading at $600, and one year later it is trading at over $5,000. That is a 800% increase, with very few signs of growth slowing down.

You see the parallel? It’s tulip mania.

But, that’s also not to say it’s unwarranted. Bitcoin and other cryptocurrencies are clearly servicing a market need, and the underlying blockchain technology that Ethereum brings to the table has also caused for a rampant rise of Ether’s (Ethereum’s token) value.

Here is what is causing “crypto mania,” and also why investors in ICOs should tread carefully.

1. The low barrier to entry for companies to hold an ICO is saturating the market (and giving the space a bad name).

The truth is, ICOs are an incredibly legitimate and innovative way for technology startups to raise money. However, many groups are raising money through ICOs before they have actually done anything beyond throwing together a whitepaper and building a website.

While I believe it’s important for founders to be optimistic about what they are working on, they should also be honest about where they are in their progress and how much work it will take to move forward. A white paper and an idea alone is not enough to build a company, and any startup looking to raise capital from angels or a VC would never be taken seriously.

2. The popularity of ICOs is eerily reminiscent of the dot-com bubble.

This is something I have been writing about a lot lately, because I think we’re approaching a pretty big “moment of clarity” in the crypto and blockchain space.

Back in the 90s, just about anyone could launch a company and raise boatloads of money just by making it sound like a trendy “Internet company.” Unfortunately, the same thing is happening today, except investors are throwing money at anyone holding an ICO.

3. We still don’t know which products will be revolutionary and which ones are pure fantasy.

Again, similarly to the dot-com boom, handfuls of entrepreneurs pursued ideas that sounded great in theory but were either ahead of their time (the Internet still in its infancy) or just that: great in theory, but flawed in actuality.

The startups today that are misleading people into thinking a product is bigger or more revolutionary than it might actually be are doing harm to the ICO space as a whole — and are going to burn a lot of people in the process. The truth is, none of us know which blockchain and crypto companies will be the true leaders yet.

Something worth noting from both a moral and an economic perspective: it took the S&P 500 index 17 years, as of this week, to recover its lost ground from the dot-com crash.

What goes up, must come down.

What may cause the bubble to burst:

ICOs will continue to raise high amounts of capital, but it’s worth noting that these overnight fundraisers will also begin to slow as regulators limit the number of participants.

What impacts these bubble-like scenarios the most, however, is the duration between the time a startup raises money through a token sale, and when that token is put on the exchanges.

Here’s the good news:

The good news is that ICOs are allowing some truly incredible startups to attract the backing they need to push innovation to an entirely new level. Those of us in the blockchain space are excited and optimistic about its future, and I personally find the work some of these startups are doing to be incredibly powerful.

So, for investors and entrepreneurs, just remember to be smart, be compliant, and be responsible in the way you make your choices. Do your due diligence. Look at the board that sits behind each company — not just the white paper available for download on their website.

ICOs are legitimate, as long as they have a clear and actionable purpose for a viable company.