The dotcom bubble was one of the most extreme speculative events in recent memory. Hitting its crescendo in March of 2000, the tech-heavy NASDAQ Composite equity index subsequently fell by 78 percent in the following 30 months.

Whenever I sense the potential for bullish enthusiasm to override basic common sense, I think about this quote from equity market pundit Jim Cramer.

“You want winners? You want me to put my Cramer Berkowitz hedge fund hat on and just discuss what my fund is buying today to try to make money tomorrow and the next day and the next? You want my top 10 stocks for who is going to make it in the New World? You know what? I am going to give them to you. Right here. Right now.

Here goes. Write them down — no handouts here!: 724 Solutions (SVNX), Ariba (ARBA), Digital Island (ISLD), Exodus ( EXDS), (INSP), Inktomi (INKT), Mercury Interactive (MERQ), Sonera (SNRA), VeriSign (VRSN) and Veritas Software (VRTS).”

ICO Initial Coin Offerings Cryptocurrencies
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Jim Cramer, Market analyst & pundit, Keynote Speech, 6th Annual Internet and Electronic Commerce Conference and Exposition, 29 February 2000

Sadly, Jim’s hedge fund hat got blown away just 10 days after he made this keynote speech. On March 10, 2000, the NASDAQ technology index peaked at 5,132.52… and then collapsed…

[Honestly, I’ve never heard of any of Jim’s “winners” he lists above, except for Virginia-based network infrastructure company VeriSign. As far as I know, the others were consigned to the dotcom bubble dustbin]

The rationale behind the bubble

The dotcom bubble was premised upon the prospects of the radical changes the internet would bring to everything – from how we do business, to how we consume, to how we live. In reality, many of those prospects (and many more) have since come to pass.

But at its height, it was a bubble driven by pure speculative short-term greed – like most bubbles. Investors flocked to technology initial public offerings (IPOs) that were backed by little more than PowerPoint presentations and flimsy business models. There was no need for the simplicities of, say ”revenue” – let alone “profit”.

But for years these dotcom IPO’s were great for quick returns. Who needs fundamentals when you can flip a stock for 50 percent more than you paid a couple months earlier?

A new rationale – and a new bubble forming

Today there is a similar speculative frenzy occurring that echoes many similarities of the dotcom bubble.

We have blockchains and distributed ledger technology, transformative, game-changing technological promises that have the capacity to not only reinvent existing business models, but completely upend traditional capital markets and business structures as we know them.

And alongside this promise, we have an army of speculators throwing money at businesses which, for the majority at least, will likely no longer exist a few years from now.

I’m talking about blockchain, cryptocurrencies, and specifically “initial coin offerings” (ICOs) in particular.

Why are people flocking to this space? Because some of the gains on offer are astronomical, and unlike what you can get in traditional capital markets.

More than bitcoin?

If you stop an average person in the street and ask them about cryptocurrencies, they’ll probably say “bitcoin” and not much else.

But in reality, bitcoin is just the “proof of concept”. There are hundreds of different cryptocurrencies currently traded in the market, 762 according to

The total market capitalisation of the entire cryptocurrency space is US$110 billion. Bitcoin is a bit less than 40 percent of that.

The market is still heavily dominated though by the current big three – Bitcoin, Ethereum and Ripple (a fintech blockchain for low-cost, fast and secure international payments for banks and financial institutions).

ICOs and insane returns

Ripple has grown 31-fold… in the past three months.

Ethereum, the current number two, is up 45-fold in six months. An US$11,000 investment in January would now be worth half a million dollars.

There are plenty of other examples. Number four on the list, Litecoin, is up 10-fold in the past six months.

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Or Bitshares (currently the ninth-largest cryptocurrency by market cap). Bitshares was created by Dan Larimer, whom I was fortunate enough to catch up with at Consensus, the blockchain conference, in New York last month.

Three months ago Bitshares had a market cap of US$14.5 million. By the time I spoke to Dan in May it was around $150 million. And today it’s around $815 million.

Crazy returns. And what’s more these cryptocurrencies are liquid and tradeable for the everyday investor.

A good friend of mine is still wincing after he sold 300,000 ether (the ethereum cryptocurrency) in January for around US$2.5 million. Had he waited until today, it would be worth US$100 million.

These are cryptocurrencies that have been around a while. But there’s a huge amount of money now looking for the next 30 or 100-bagger, and that money is pouring into initial coin offerings (ICOs).

This is a relatively new form of financing for cryptocurrency startup firms. It is similar to crowdfunding. The company will typically write a whitepaper outlining its project, along with the general terms of the ICO. Early investors can then put money into the ICO, be issued with cryptocurrency tokens which can then be traded in the secondary market.

Observations from the front line

Having participated in a few ICO’s of late, I’ll share some observations.

Most crypto companies have open forums for their “investors” to communicate. They use messaging applications like Slack or Telegram. So you can see what the general “investor” base is like by keeping an eye on these message groups, which run to thousands of people.

There are a huge number of people who quite simply couldn’t care less about the technology, whitepaper, team, management, or anything technical at all. They are simply looking to buy ICO’s and flip them immediately for profit.

By my estimate, nearly two-thirds of the enquiries on these community channels are either related to the ICO terms (i.e. What is this? How do I buy it?), or asking when the particular cryptocurrency will be listed on an exchange (i.e., How quickly can I cash out?).

This is pure, unfettered speculation. It’s gambling, nothing more. And it’s not sustainable in the long-run of course.

Now I’m not saying that nobody is looking at proper business cases and asking the right questions. I’m just observing that hundreds of millions of dollars are pouring into a very, very wide range of ideas (many that exist solely in a whitepaper) right now.

These kinds of capital raises also represent a massive mismatch of capital versus quality.

Typically, with an unproven business model (i.e., little more than a whitepaper), you would be able to raise angel venture capital (VC), or seed money… a few hundred thousand dollars perhaps.

But now, these same companies, because they are focused on blockchain, are raising tens of millions of dollars or more. In traditional venture capital, these kinds of sums are reserved for proven, fast-growing and revenue-generating operational businesses.

There will be blood… at some stage

It doesn’t take a genius to realise that huge sums of capital will be squandered during this speculative boom.

Some blockchain companies may become the next Apple or Microsoft… but most will likely become the next

(, one of Jim Cramer’s ‘winners’, peaked at US$1,305 a share shortly after his February 2000 keynote. By June 2002 it was trading at US$2.67.)

Also, there isn’t much in the way of regulatory clarity on many of these cryptocurrencies.

The cryptocurrency industry is now discouraging use of the word ‘ICO’ now because of the clear stock market connotations. Because of the lack of regulatory oversight, coupled with speculative mania, I suspect it’s only a matter of time before we witness a largescale incident of fraud (at which point the same ICO punters will probably go crying to the regulators demanding retribution).

To provide some perspective here, when Snap Inc. (the company behind social media platform Snapchat) went public earlier this year, the S-1 form registration statement filed with the SEC was approximately 120,000 words long, outlining in huge detail everything from use of proceeds, to underwriting, related persons, management… you name it.

Bancor, on the other hand, a cryptocurrency which recently pulled in US$150 million in an ICO, did so on the back of a 12-page whitepaper (I read it – one of those 12 pages is the cover, and one is the table of contents).

Now when it comes to legal, plenty of companies do adopt best legal practices, spending a lot of time and money to do so. But plenty do not. And when investors are simply focused on “when’s the ICO?” and “how soon can I dump it afterwards?” then I think you’ll agree that there are incentives for bad actors to take advantage.

Regardless of the incredible volatility and wild west nature of this space, I still believe that if you have a little speculative itch in you, then you should get some cryptocurrencies under your belt.

You see, US$100 billion is a drop in the ocean of what cryptocurrencies will one day be worth. You just need to proceed very, very carefully. And “invest” no more than you can absolutely afford to lose.

Good investing,