South Sea Bubble & Initial Coin Offerings Similarities
The craze surrounding cryptocurrencies and initial coin offerings is an echo of the South Sea Bubble that hit England in the early 1700s.
South Sea Bubble
The South Sea Bubble wasn’t just a bubble related to trade involving the South Seas, the waters off South America. It was also a joint stock bubble
The South Sea Company was a joint stock offering to fix the finances of England. Ultimately, it was a scheme. No trade would reasonably take place but the company’s stock kept rising on promotion and the hope of investors.
The joint stock of the South Sea Company rose so much and captivated the attention of so many, that “enterprising” individuals looked to raise money by launching their own stock offerings.
It was an unregulated market and all manner of initial stock offerings were being floated.
- For the improvement of London and Westminster.
- For settling the island of Blanco and Sal Tartagus.
- For the importation of Flanders Lace.
- For purchasing land to build on.
- For trading in hair.
- For breeding horses.
- For a perpetual motion machine.
And much more. Some plausible and others absurd.
But no person was more “enterprising” in their stock offering than the following man. From Charles McKay’s classic Extraordinary Popular Delusions and the Madness of Crowds
But the most absurd and preposterous of all, and which showed, more completely than any other, the utter madness of the people, was one, started by an unknown adventurer, entitled “company for carrying on an undertaking of great advantage, but nobody to know what it is.”
Next morning, at nine o’clock, this great man opened an office in Cornhill. Crowds of people beset his door, and when he shut up at three o’clock, he found that no less than one thousand shares had been subscribed for, and the deposits paid. He was thus, in five hours, the winner of 2,000 pounds. He was philosopher enough to be contented with his venture, and set off the same evening for the Continent. He was never heard of again.
The demand or joint stock offerings grew so large that people threw caution to the side. They did not want to miss out on the next big winning joint stock offering and they would pay almost any price.
Cryptocurrencies & ICOs
Fast forward to today and the buzz around Cryptocurrencies.
The two leading names are Bitcoin and Ethereum. Both cryptocurrencies have seen their trading values skyrocket within the past year. And the rise has attracted a lot of individuals looking to invest in the next great thing.
It has also attracted “enterprising” people looking to raise capital through an initial coin offering (ICO).
An ICO typically involves selling a new digital currency at a discount — or a “token” — as part of a way for a company to raise money. If that cryptocurrency succeeds and appreciates in value — often based on speculation, just as stocks do in the public market — the investor has made a profit.
Unlike in the stock market, though, the token does “not confer any ownership rights in the tech company, or entitle the owner to any sort of cash flows like dividends,” explained Arthur Hayes of BitMEX, one bitcoin exchange.
An initial coin offering is unregulated means to bypass the traditional way of raising capital for a new venture.
Afraid of missing out on the next big thing, people are willing to hand their money over no matter how thin the premise.
Dentacoin is the first Blockchain concept designed for the Global Dental Industry. The Dentacoin ERC20 token is configured to be used globally by all individuals.
Dentacoin aims at improving dental care worldwide and making it affordable through utilizing the Blockchain advantages. We believe that empowering patients to become an active part in the industry development process is the key to shaping the future of dental care.
The coin issuer is asking for $100 million to make coupons for marketing services with its parent company, Gravity4.
Stox.com needs $30 million for what are essentially casino chips to use in a prediction market
Hubii seeks $50 million so writers, musicians, and filmmakers can cut out Netflix, Spotify, and YouTube and somehow still get paid.
Paragon requires $100 million for a farm-to-pipe cannabis supply-chain tracking and payments system.
And many others. Some more absurd than others.
How Does It End
The South Sea Bubble ended when the English government enacted laws to stop the excessive offerings.
The unregulated markets became regulated.
Most likely the same thing will happen to cryptocurrencies and ICOs.
When the cryptocurrency markets and the “me too” initial coin offerings become too big to ignore, governments will look to regulate them.
China already banned cryptocurrency exchanges.
ICOs are essentially unlicensed security offerings. The SEC and U.S. regulators don’t like that.
When the bubble bursts I don’t think the fist movers and the established players like Bitcoin and Ethereum will go away. Blockchain technology should find its way into everyday life.
Will all these “me too” offerings continue to exist after the bubble bursts?
Avoid the FOMO
If the fear of missing out on the cryptocurrency craze strikes you and you’re bombarded with all sorts of “get rich quick” cryptocurrency schemes remember this.
If you think you want to invest in an ICO remember you’re giving your money to a stranger on the internet who might be using a fake name, who probably isn’t building what they say they will, whom you can’t sue for fraud and is probably stealing your money to buy a Porsche.