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Wednesday Aug 22nd 2018

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ICOs: Rethinking The Wisdom Of The Crowd



De Silva

In the last year, initial coin offerings attracted billions of dollars in cryptocurrency capital from retail investors. Some folks have hailed ICOs as democratizing startup investment opportunities, but the system is not without its flaws.

When I was small, my mom played a guessing game with me and my sister when we went shopping. My mom would spot an item in the store, maybe a television or a stuffed animal. Then, she would ask how much we thought the item was worth. After we announced our guesses (and revised our estimates based on gentle suggestions), my mom would tell us the amount listed on the price tag. Whoever guessed closer to the actual price won the round – though we never really kept track of who was ahead.

This childhood game taught me to think about how much something is worth to me rather than passively consuming regardless of price. Now, when I go to a store, I quickly think to myself what I'd be willing to pay for an item that I want – and if the actual price is roughly equivalent or lower, I happily make the purchase. If not, I'll probably pass and look for that product at another store. Of course, sometimes, I splurge on things like concert tickets or video games, but I try to use the pricing game as a guiding framework.

Making judgments about stocks or other investments is a similar but obviously more challenging exercise. Especially in the blockchain and cryptocurrency world, it's difficult to determine whether a project has promise or little more than a fancy website.

Cryptocurrencies have clearly facilitated a faster and more global mechanism for raising capital. However, the ease with which projects are soliciting investors is worrisome. The public isn't well-suited to making careful assessments about highly technical projects, so many ICOs can seem exploitative.

By and large, it seems, founders have good intentions and truly want to deliver useful products on schedule. Nobody's setting out to be a failure. What's dangerous, though, is that retail investors have pumped billions of dollars into many projects that probably will not deliver. It's somewhat of an ethical dilemma. As a founder, how do you convince people of your grand vision? Bold statements and positive outlooks are practically necessary. But principled innovation should not be blind.

Ethereum's Vitalik Buterin has said that he considers it "optimistic" to guess that only 90 percent of token startups will fail. That number could easily be higher.

The other day, on Twitter, one developer pointed out the incongruity between a particularly prominent ICO that has raised boatloads of money despite a design flaw and Microsoft's announced purchase of GitHub. One commenter who replied immediately got to the heart of the discrepancy.

When it comes to the ICO markets and cryptocurrency more broadly, nobody's quite sure how to price these alleged assets. Thus far, the public has demonstrated little restraint with each new blockchain project. Few questions are asked when the charts are turning up green.

Ultimately, we're not going to prevent emotional decision-making by the masses but, as a community, we can design better public fundraising models that appropriately balance risk and early investment opportunity. We owe it to ourselves and the future.

Matthew De Silva

Matthew has a passion for law and technology. He graduated from Georgetown University, where he studied international economics and music. Matthew enjoys biking and listening to tech podcasts. He lives in Los Angeles.

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