If you’re trying to wrap your head around Initial Coin Offerings (ICO), you’re not alone.
While debate rages around whether major cryptocurrencies such as Bitcoin and Ethereum are in a bubble, there are also new ICOs being created every day.
One could argue that the ICO craze reached its zenith last Monday when Burger King in Russia launched a “whoppercoin“.
The coin can be obtained via the purchase of Whoppers at Russian Burger King restaurants, although it’s also been described as a glorified loyalty points program.
While that may the case, the introduction of new ICOs continues to proliferate. The sharp rise this year is primarily due to the widespread use of the Ethereum blockchain, which provides a simpler coding platform than Bitcoin for launching a new digital currency.
At the time of writing, coinmarketcap.com listed 848 different cryptocurrencies with a circulation of digital coins in supply, and a market capitalisation shown in US dollars.
A market cap is calculated by multiplying the number of coins in supply by the individual value of each coin.
That figure is typically shown in US dollars, but for each new ICO it’s not actually traditional fiat currencies that are used to buy the coins.
Instead, the price action is driven by a transfer of funds from other cryptocurrencies — also known as a coin swap.
Julian Hosp, the co-founder of cryptocurrency platform TenX (which also has a digital coin of its own), told Business Insider that there are significant doubts around the legal framework for new ICOs.
“If you accept fiat you’re probably going to get into big trouble. You should only be accepting other cryptocurrencies, do a coin swap,” Hosp said.
“We give talks, presentations and workshops on the proper standards from a legal and marketing perspective. One of the key things is – never accept fiat money.”
“Accepting fiat currency during an ICO could easily be seen as selling a marketable security. Compared to accepting digital currencies, it’s very different from a legal perspective.”
So in effect, for each new ICO the coin’s value is driven higher via the transfer of bigger cryptocurrencies — namely Bitcoin and Ethereum.
However, the value of an established cryptocurrency such as Bitcoin is still expressed in US dollar terms.
And presumably, at least some of Bitcoin’s current value is derived from its capacity to be converted into USD, given that right now it has very limited use as a means of exchange. In other words, very few outlets around the world accept digital currencies to pay for goods and services.
Advocates for digital currency argue that will change, but the broader use of cryptocurrency in day-to-day transactions will still require a buildup of trust from consumers.
So that raises questions around what the US dollar-based market cap of each new ICO actually represents, given the lack of a legal and regulatory framework for accepting fiat currency.
“I personally am very bearish on ICOs,” Hosp said. “I’m very wary and cautious because I think at the moment they are misused, and it can be very dangerous.”
Regulatory develoments for cryptocurrencies are still in their early stages. And so far, regulatory measures seem to be focused on Bitcoin, not the hundreds of other digital currencies.
Earlier this year, the US Securities and Exchange Commission rejected an application for a Bitcoin Exchange Trade Fund (ETF). But interestingly, the SEC said that it would leave the door open for approving an ETF if there was a regulated market for trading futures.
Enter the US Commodity Futures Trading Commission (CFTC), which in late July ruled in favour of the first regulated exchange and clearing house for the trading of futures contracts between Bitcoin and US dollars.
Last week, major global banks announced a partnership to develop a digital coin using blockchain, with the aim of speeding transaction and settlement times. The project will be carried out in conjunction with lawmakers and regulators, with the first roll-out not scheduled for more than a year.
For now, experienced financial analysts such as Con Michalakis, the chief investment officer at Statewide Superannuation, say that the market for cryptocurrencies looks more like a bubble.
“It certainly has the characteristics of past bubbles,” Michalakis said. “It’s like the dot.com era, when every asset is going up by association.”
“Cryptocurrency started around the idea that you can move payments around quickly, but now it seems like it has become a plaything.”
That’s one way to describe the explosion of ICOs in the digital currency space. As new regulatory measures are introduced and the market continues to mature, time well tell whether each new digital coin will be able to maintain their current market capitalisation in US dollars.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.