The hype that has fueled the skyrocketing prices of bitcoin and other cryptocurrencies was on full display this week in San Francisco, where a conference showcasing young companies seeking to catch the crypto wave before it crests offered a perplexing mix of a fantastical future and likely reality.
There was a feeling in the air at the Token Summit similar to the dot-com boom, when many optimistic entrepreneurs piled onto a new technology hoping to cash in with me-too ideas. At this early stage, crypto appears to be one of the biggest speculative bubbles in decades or the unregulated global currency of the future. I believe it will probably be both, but I was warned to treat this Wild West of cowboy currency with an open mind.
“You have to absolutely leave your assumptions at the door,” cautioned David Noble, who teaches entrepreneurship as an assistant professor in-residence at the University of Connecticut. “These kids don’t care, they want to build something.”
Cryptocurrency is still young, with many startup efforts or projects focused on an infrastructure for trading and deploying more digital currencies beyond bitcoin BTCUSD, +2.54% , especially with initial coin offerings, known as ICOs. Noble said the 700-plus attendees at the summit included many true idealists, but he added that there will be many ICOs that “are going to blow up in everyone’s face, just like the dot-coms.”
Presenters, panelists and attendees ranged from developers in T-shirts, to investors trying to look laid-back in jeans, to lawyers in full suits. While the frothy market and other bubbly token offerings were on top of everyone’s minds, there were also repeated references to tech failures or bottlenecks — including a big one in the Ethereum blockchain platform caused by the viral Crypto Kitties game — and rivalries among different developers.
There were also mentions of the criminal element that still taints bitcoin, which was used for payment on the infamous drug-dealing Silk Road website and continues to be used for nefarious purposes on the dark web and elsewhere. One bitcoin entrepreneur, BitInstant co-founder Charlie Shrem, spent a year in federal prison after pleading guilty to aiding and abetting an unlicensed money transaction, the type of news item that sparks necessary precautions.
“We just spent $30K on a background search,” said Lowell Ness, a managing partner of Palo Alto law firm Perkins Coie, when a panel of local lawyers focused on future cryptocurrency regulation touched on how they conduct due diligence on potential clients. “We are doing literally private-eye-level background checks. You never do that in Silicon Valley.”
All the valuation hype, combined with an increasing interest from mainstream investors, means there are sure to be some implosions. More than $2 billion has been raised by 700-plus companies in the digital currency area this year alone and there are now over 900 cryptocurrencies, according to CoinMarketCap.com, up from 800 in October. This summer, the SEC said that ICOs are subject to federal securities laws, although it did not bring any charges against Slock.it, the decentralized group of DAO token creators it was investigating.
During the regulatory discussion, Nancy Wojtas, a partner at Cooley LLP and former Securities and Exchange Commission counsel, believes some regulation of ICOs will come as a result of enforcement and that the agency will pick one big token offering to make a case.
Kathryn Haun, a former federal prosecutor and now on the board of Coinbase in San Francisco, agreed.
“They will go after a big whopping number like $100 million where investors have lost a lot of money and where there is no clear plan to build an actual product,” she said.
Presenters at Token Summit seemed sure that would not be their fate, however.
While the conference had many panels on hot topics, many of the sessions were a way for young companies to tout their upcoming ICOs, the largely unregulated sale of new digital currencies, typically in exchange for bitcoin. On Tuesday, as MarketWatch attended Token Summit, the price of bitcoin topped $12,000, giving it a market cap of $200 billion after the price soared more than $6,000 in the past month.
Those astronomical gains haven’t stopped: On Thursday, bitcoin soared past $17,000 into yet more uncharted territory.
As new digital coins and other enabling tech was discussed in panel discussions or brief presentations, quirky symbols representing companies or open-source projects sometimes appeared on the big screen instead of a company name, such as an x with a zero symbol under Will Warren, the chief executive and co-founder of the 0x open protocol project.
Past token offerings and future sales were a constant theme. The co-founders of Bloq are developing another digital coin called Metronome, which will be capable of operating on other blockchains, the digital ledger that stores all the crypto transactions. The private company, based in Chicago, has plans for an auction of Metronome tokens, instead of an ICO, in early February.
“Over the first three years, the proceeds will make a market for Metronome,” said Bloq CEO and co-founder Jeff Garzik. “We don’t have to go and raise $100 million for ourselves, we just want this to work and get out there.”
After the panel, Garzik tweeted that the “The lack of a private pre-sale for #metronome @MTNToken just melts peoples brains,” referring to a trend of some initial coin offerings being dominated by big “whale” investors who get in early. After the conference, Bloq co-founder Matt Roszak said in an email that the company was doing an auction to potentially reduce volatility in Metronome’s price and maximize its utility as a cross-blockchain token.
“Depending on the demand, it’s entirely possible that the initial launch auction will raise near or in excess of $1 billion, but we cannot emphasize enough that neither Bloq nor the developers are pocketing one dime of the proceeds,” he said. “Rather, these proceeds are going to smart contracts which will support Metronome price stability and the community’s development efforts going forward.”
Brian Hoffman, chief executive and co-founder of OB1 and project lead on the company’s decentralized marketplace, OpenBazaar, said that in the past few months, the landscape has changed.
“We have transitioned to the fact that tokens are here to stay and they serve a really promising opportunity.”
OB1 will offer an OpenBazaar token for merchants on its platform that will serve as rewards, while still using bitcoin as its core currency on its commerce platform. Hoffman called it eBay EBAY, +0.05% without the eBay.
Thomas Greco, a special advisor to Omise, a venture-backed payments company based in Bangkok, talked briefly about its ICO earlier this year. The company’s digital payments platform, called OmiseGO, raised $125 million when it initially hoped to raise $16 million with its OMG tokens, which now have a stunningly scary $1 billion total valuation.
“But we go up and down,” Greco said. “There was no marketing done, no one was paid. As a token project, we are taking community money to build community good.”
OmiseGo is developing an infrastructure to facilitate mainstream payments for small and large businesses.
The Token Summit was not dominated by Silicon Valley startups. Companies and entrepreneurs came from all over the world, where they work on distributed open-source-based projects. One foreign emissary was there in hopes of luring young entrepreneurs into creating a Silicon Valley of their own for crypto companies.
Oliver Bussmann, the president of the Crypto Valley Association in Zug, Switzerland, a small city 30 minutes from Zurich, made a pitch to entrepreneurs on the merits of moving their companies to Zug and its environs, which he described as a center of the bitcoin ecosystem. Bussmann, a longtime tech executive and most recently group chief information officer of UBS, is now its evangelist.
“Everything is set up for tech [in Zug], but it is for blockchain,” Bussmann said in an interview. “You have a local government you can talk to, you can pay with bitcoin, it is accepted for public services.” He said the legal environment in the U.S. is very complicated for crypto startups. “If you want to do something it takes so much more time, that ha an impact on development and adoption.”
With all the cryptocurrency mania, it’s easy to think it is a fad that will die upon implosion or as a result of a more serious crackdown by regulators. But digital currency, as complex as it has become, cannot be ignored. Noble, the UConn professor, believes that just as the survivors of the dot-com boom and bust now dominate the internet and much of the global tech economy, the world of bitcoin will see a similar pattern no matter if a bubble pops.
“Do I think the evolution of money is to a digital asset? I do, 100%,” he said.
The conference ended with a chat with Naval Ravikant, serial entrepreneur, investor and co-founder of AngelList. He cautioned that in this frothy environment there are a lot of tokens trading at a very high value “that are junk,” without citing any specifics.
But his most memorable comment was one that was also tweeted by many crypto believers: “Money is the bubble that never pops.”