Initial coin offerings are the hot new way to raise money fast — so hot, in fact, that the co-founder of the ethereum network thinks the system needs to cool off before it implodes.
“It’s a ticking time-bomb,” Charles Hoskinson told Bloomberg News. “There’s an over-tokenization of things as companies are issuing tokens when the same tasks can be achieved with existing blockchains. People are blinded by fast and easy money.”
An ICO is a blockchain-based means of crowdfunding in which a company issues tokens — essentially a mini-cryptocurrency that can be traded or can unlock benefits. Tokens can be bought with currencies such as bitcoin, or, more popularly lately, ether, which is linked to the ethereum network. One startup raised more than $150 million in just three hours in its ICO, and Bloomberg reported more than $1.3 billion has been raised so far this year through ICOs. On Saturday, Tezos announced the largest ICO seen yet, raising $232 million.
But ICOs have their dark side. A hacker stole about $7.4 million during a recent ethereum ICO by tricking buyers into sending their money to the wrong address. Some experts warn that ICOs make it too easy for scammers to run ponzi schemes against naive investors. And the almost magical money-making ability of ICOs has others warning of a bubble.
Since ICOs are intended to raise money quickly, they bypass the strictly regulated fund-raising process that’s typically required by banks or venture capitalists — leaving investors exposed to more risk.
Hoskinson and others warn the Wild West attitude of ICOs is not sustainable, and will force the Securities and Exchange Commission to step in and regulate the industry.
Wildly fluctuating digital currencies don’t help the matter, and ethereum has been particularly volatile of late. After peaking at $395 on June 13, ethereum prices plunged more than 60%, hitting a low of $155 on Sunday. On Tuesday, ethereum was up 16%, at $226.37, according to Coindesk.