Earlier this week, the cryptocurrency industry was hit by a shockwave when Chinese authorities declared Initial Coin Offerings to be illegal and companies were required to halt of fundraising activities ‘immediately’.
At the time of the announcement, the price of Bitcoin was hovering at around US$4,500 – US$4,600 after falling from a US$5,000 peak earlier in the week. Ether (the cryptocurrency associated with Ethereum technology) was in the US$350-range after dropping from US$390 on Monday.
After the announcement, both cryptocurrencies tumbled — Bitcoin bottomed out at just over US$4,000 while Ether hit a low of US$275. But ‘bottomed out’ is the correct term, because both currencies have since recovered (Ether is currently priced at US$325 and Bitcoin costs US$4,546).
While the ICO-ban seems to have slowed down a 6-month-long eruption of growth, this does not appear to be the needle that pops the bubble.
Which begs the question, “How should we think about cryptocurrencies?”
Is the gold-rush over?
In a word, maybe. But after asking around the Southeast Asia cryptocurrency world, the conclusion was fairly obvious:
Nobody actually knows and anybody who says they can predict the future pricing of cryptocurrencies is — pardon the French — talking out of their ass.
A few investors predicted a potential bear market, a couple others think the recent US$5,000 peak is not a cap and the price should rise in the future. In conclusion, it is reminiscent the type of finance chatter is typical around equities, commodities and the like.
That being said, in the near future, Ether is probably the most interesting of the two currencies to watch.
The reason is, because of the ability to build smart contracts via Ethereum, Ether is an appealing ‘form of value’ for a company selling its own internal tokens as an investment tool. Companies need to make their tokens worth something, so they usually attach their coins to Bitcoin or Ether.
The most disruptive aspect, thus far, for Ethereum, has been the growth of “tokenized assets” being created on the Ethereum public chain to create incentivized platforms; wherein the owners of the token use that asset to interact with and utilize the platform itself.
A ban on ICOs seems to directly hit at the very infrastructure that has made the cryptocurrency explode over the last six months. (In March 2017, about when the value started to skyrocket the price of Ether was about US$20).
Bitcoin is likely the “safer bet” for speculators because the technology itself is a currency, which is not true for Ethereum.
Cryptoheads meet Mom-and-Pops
The next cultural shift the cryptocurrency world is going to have to grapple with is the growing population of regular mom-and-pop investors who are buying into the market.
Over this summer, I can point to three friends who bought coins “just for fun” and Reuters reported that a part of the price gain was driven by ‘Mrs. Wantanabe’ (a phrase for Japanese housewives who invest during their free time).
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Previously, crypto investment was a ‘nerd’s game’ — so convoluted and seemingly complicated that people just tuned-out whenever the subject was brought up.
The recent price surge and debate about the legitimacy of ICOs has brought with it media attention. Now, those who do not really understand how Bitcoin is priced don’t seem to care.
I personally do not think these people are going away and now the miners, developers and traditionalists are going to have to realise that Mrs. Wantanabe is a part of the ‘community’ (a word that is still used frequently when speaking with blockchain enthusiasts).
This trend should only be accelerated as debit/credit cards tailored specifically for cryptos. If they take off, they will make it more convenient to buy goods at stores. Then, the idea of Bitcoin as money is an easier leap for the more dubious individuals.
How ICOs fit in
ICOs are the wild card.
People who outright dismiss the investment strategy are flat wrong (Ether is itself an ICO). But the underlying concern of fraud is legitimate.
ICOs are the the 2017-version of exchange collapses for cryptocurrency. They do not pose a fundamental threat to the life of the industry – but they can be damaging enough to the reputation to drag it down for awhile.
As governments get more digital-savvy, it seems as if ICOs is an issue financial regulators are willing to take on and it’s not unreasonable to expect more companies will follow the Chinese lead.
But, for now, the China ban on ICOs isn’t a ban on the investment strategy — and one crypto entrepreneur emailed me that he was dubious it would be a full-ban in the long run. He reminded me that China banned Bitcoin a few years ago…except the reality on the ground was quite a bit different.
A long-term ban on ICOs in China would mean companies would leave China to raise funds — and places like Hong Kong are already discussing regulations should they may become the hub for such transactions.
Singapore also seems like a likely destination to fill a gap left by a Chinese ICO ban.
My personal conspiracy theory is the ICO ban is part of the run-up to the Communist Party’s 19th Party Congress. Party leaders can’t risk a high-profile fraud case, or the simmering debate, ahead of the Party’s most important political event.
In my opinion, it would not be surprising if Chinese regulators loosen the ban after mid-October. They may not allow for a free-for-all in the long-term, but I wouldn’t be shocked to see rules slowly (and quietly) get pulled away.
To date, ICOs haven’t experienced that high-profile collapse in which a company can’t pay back its tokens. With the lack of regulations, this seems like an inevitability, and it will be the crisis test for entire funding strategy.
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