Initial coin offerings have offered some of the greatest investments of all time, yielding 1000x returns from investments made just three years ago. Unfortunately, today we are seeing an oversaturation of these offerings. ICOs are attempting to fill increasingly small niches, performing very specific tasks and offering little functionality. In many cases, the markets are either not ready to adopt cryptocurrency or there just isn’t much of a market at all. But nobody wants to be left out. New investors think ICOs are gold mines, that investing in them will turn them into overnight millionaires. However, these new startups are offering unrealistically high expectations and are subsequently valuing themselves far beyond what they are worth, but yet people continue to invest.
The issue of ICO oversaturation is very similar to that of the early 19th century English railways. However odd the topic of railways may sound, it is actually very applicable precedent that can help us understand what we are seeing today. When the first railways were built during the industrial revolution in the early 1800’s, they were immensely profitable ventures, often yielding 1000x returns - much like Ethereum. Railways were the future in 1840. They were arguably one of the most significant advances in technology at the time. The railways connected people like never before, there was no telling how much money people were going to be able to make in this new era of technological advancement. It didn’t take long for speculation to get out of hand. Six years into the railway mania many had made and lost fortunes investing in railways that connected smaller and smaller towns.
The growth of the railways was unsustainable, but that didn’t stop the influx of investment that came during the period between 1840-1846. The Railway Mania became a self-promoting cycle based purely on over-optimistic speculation. The problem began as a result of the British government’s almost totally laissez-faire system of non-regulation in the railways. There were no limits on the number of railways and no real checks on the financial viability of each new line. Because of the lack of regulation virtually anyone could form a company, gain investment and begin development. New investors were constantly drawn in by the opportunity to invest in the ever-expanding railways because of stories about how immensely profitable other ventures had been. The Leeds and Selby Railway was one of the first ever built, having connected two major cities it served as a major hub for interstate commerce and generated huge profit. However great the investment may have been early on, railways between major cities had all been developed by the time the general public caught on. New railways popped up between smaller and smaller towns. The unviability of these miniscule use railways became clear, investors began to realize that the railways were not as lucrative and as they had been led to believe.
It may seem like a fairly “out-there” comparison at first glance, but if you really look at it, cryptocurrency is shockingly similar to the 19th century railways. Early investors in cryptocurrencies like Bitcoin and Ethereum made fortunes because the technology was new and they were able to seize huge market opportunities by addressing the big needs first. Bitcoin was the first truly anonymous decentralized digital currency, it still serves today as the anchor for the industry. Ethereum came along shortly after and leveraged blockchain technology to its furthest extent, enabling smart contracts and decentralized application development. These two famous cryptocurrencies came and filled the biggest portion of the markets, yielding massive returns for early investors. But these investors came long before the general public had caught on, cryptocurrency didn’t start taking real mainstream investment until 2017. At this point, most of the major infrastructure has already been developed and new crypto startups are setting out to build increasingly niche blockchains that nobody really wants nor needs. It is just like the railways that attempted to connect two tiny little towns and somehow expected to make the same profits as those that connected the largest cities in England.
The railways made a lot of people rich, getting there first was certainly a major advantage. But people are inherently irrational and greedy, after seeing others make so much money they wanted their share. People like this often lost everything. It is a cautionary tale to us all. Although cryptocurrency may be new and it may have a lot of room to grow, be careful of ICO’s, there are a lot of great investments out there but don’t get too caught up in the hype. Make sure you properly evaluate whether or not the cryptocurrency you are hoping to invest in actually has real potential or if it’s just trying to leverage the overly-optimistic speculative state of the markets.