Lessons from the 2017 ICO Boom

The 2017 ICO Boom: A Brief Overview

Sep 30, 2024

The 2017 ICO boom marked a significant moment in the history of cryptocurrency and blockchain technology. Initial Coin Offerings (ICOs) became a popular method for startups to raise capital by issuing their own digital tokens. This period saw an unprecedented surge in ICO launches, with billions of dollars pouring into these projects. The excitement surrounding this new fundraising model led to a frenzy of investment activity, often driven more by speculation than by sound financial principles.

As we examine this phenomenon, it’s crucial to consider the words of ancient Chinese philosopher Lao Tzu (6th century BC), who said, “He who knows that enough is enough will always have enough.” This wisdom serves as a stark contrast to the excess and greed that characterized much of the 2017 ICO boom.

Mass Psychology and the ICO Craze

The 2017 ICO boom provides a textbook example of how mass psychology can influence financial markets. During this period, investors were swept up in a wave of excitement and fear of missing out (FOMO), often making investment decisions based on emotion rather than rational analysis.

Gustave Le Bon, a French psychologist from the late 19th century, observed that “The masses have never thirsted after truth. They turn aside from evidence that is not to their taste, preferring to deify error if error seduces them.” This insight aptly describes the behaviour of many investors during the ICO boom, who chose to ignore red flags and potential risks in favour of the promise of quick riches.

One notable example of this phenomenon was the Tezos ICO, which raised $232 million in July 2017. Despite concerns about its governance structure and delays in token distribution, investors poured money into the project, driven by the belief that it would revolutionize blockchain technology.

Cognitive Biases at Play

Several cognitive biases were evident during the 2017 ICO boom, influencing investor behaviour and decision-making. One prominent bias was the bandwagon effect, where individuals adopted behaviours or beliefs simply because others were doing so. This led to a snowball effect of investment in ICOs, regardless of their underlying value or potential.

Daniel Kahneman, a Nobel laureate in economics, noted that “A reliable way to make people believe in falsehoods is frequent repetition because familiarity is not easily distinguished from truth.” This observation explains how the constant hype and discussion surrounding ICOs in 2017 led many investors to believe in their infallibility despite the lack of concrete evidence supporting these beliefs.

Another cognitive bias at work was confirmation bias, where investors sought out information that confirmed their pre-existing beliefs about the potential of ICOs while ignoring contradictory evidence. This led to an echo chamber effect, further fueling the hype and speculation surrounding these investments.

Technical Analysis: Warning Signs Ignored

While technical analysis is typically associated with traditional financial markets, some of its principles can be applied to the cryptocurrency and ICO space. During the 2017 ICO boom, several technical indicators suggested that the market was overheated and due for a correction.

For instance, the Relative Strength Index (RSI), a momentum indicator, showed overbought conditions for many cryptocurrencies and ICO tokens throughout 2017. However, these warning signs were largely ignored by investors caught up in the excitement of the boom.

As legendary investor Warren Buffett once said, “Be fearful when others are greedy and greedy when others are fearful.” This advice, if heeded, could have protected many investors from the losses that followed the ICO boom’s collapse.

The Role of Social Media and Information Cascades

Social media played a significant role in amplifying the herd mentality during the 2017 ICO boom. Platforms like Twitter, Reddit, and Telegram became hotbeds of ICO promotion and discussion, creating information cascades that rapidly spread hype and FOMO.

Herbert Simon, a Nobel laureate in economics, coined the term “bounded rationality” to describe how individuals make decisions based on limited information and cognitive capabilities. In the context of the ICO boom, social media exacerbated this phenomenon by bombarding users with a constant stream of information, making it difficult for investors to make rational decisions.

The BitConnect ICO serves as a prime example of how social media can fuel irrational investment behaviour. Despite numerous red flags and warnings from experts, BitConnect’s aggressive social media marketing campaign and promises of high returns attracted thousands of investors before its eventual collapse in January 2018.

Lessons from History: The Tulip Mania Parallel

The 2017 ICO boom is similar to historical financial bubbles, particularly the Dutch Tulip Mania of the 17th century. Both events were characterized by irrational exuberance, speculation, and a disconnect between asset prices and intrinsic value.

Charles Mackay, writing about the Tulip Mania in his 1841 book “Extraordinary Popular Delusions and the Madness of Crowds,” observed that “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.” This insight remains relevant in understanding the group psychology that drove the ICO boom and its subsequent bust.

Regulatory Response and Market Maturation

The excesses of the 2017 ICO boom eventually led to increased regulatory scrutiny and intervention. In the United States, the Securities and Exchange Commission (SEC) began cracking down on ICOs deemed unregistered securities offerings.

This regulatory response aligns with the observations of John Stuart Mill, a 19th-century philosopher and economist, who noted that “The only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others.” The SEC’s actions can be seen as an attempt to protect investors from the harmful effects of fraudulent or misrepresented ICO projects.

The Aftermath: Learning from Mistakes

In the wake of the 2017 ICO boom and subsequent market correction, many investors and industry participants were forced to reassess their approach to cryptocurrency investments. This period of reflection led to valuable lessons about the importance of due diligence, risk management, and scepticism in the face of hype.

As George Santayana famously stated, “Those who cannot remember the past are condemned to repeat it.” The experiences of the ICO boom serve as a crucial reminder of the risks associated with speculative investments and the dangers of following the herd without critical analysis.

Conclusion: Moving Forward with Wisdom

The 2017 ICO boom provides a wealth of lessons about herd mentality, cognitive biases, and the psychology of financial markets. By studying this period, investors and market participants can gain valuable insights that will help them navigate future market cycles and investment opportunities.

As we reflect on the events of the ICO boom, it’s worth considering the words of Benjamin Graham, the father of value investing: “The investor’s chief problem – and even his worst enemy – is likely to be himself.” This reminder of the importance of self-awareness and emotional control in investing remains as relevant today as it was during the height of the ICO frenzy.

Moving forward, investors must approach new technologies and investment opportunities with a balanced perspective, combining enthusiasm for innovation with a healthy dose of scepticism and rigorous analysis. By learning from the lessons of the 2017 ICO boom, we can work towards creating a more stable and sustainable financial ecosystem that benefits all participants.