In a recent video posted to his personal YouTube channel, Dogecoin creator Jackson Palmer explained how, in his view, the frenzy around Initial Coin Offerings (ICOs) is causing a speculative bubble in the price of ether, which is the native token of the Ethereum network. In the video, Palmer discussed four different ways the bubble could eventually pop.
“It could go on indefinitely, there’s no real precedent for this,” said Palmer. “But I think many people in this space believe it’s not sustainable. Something is going to make this bubble pop in the future, we just don’t know what.”
Palmer noted that the smart-contracting capabilities of Ethereum aren’t really being used for anything other than ICOs right now, and he “thinks that’s really telling”.
1 - An ICO Gone Wrong
When discussing specific reasons as to why the bubble in the price of ether could pop, Palmer first pointed to the possibility of an ICO going terribly wrong. The Dogecoin creator pointed to The DAO as an example of this issue revealing itself in the past.
“[The DAO] was one of the first big smart contract ICOs on Ethereum,” explained Palmer. “They raised millions and millions of dollars, but the problem: there was a bug in the code. On Ethereum, code is law - it’s immutable. Hackers got in, they exploited this bug, and they stole millions of dollars.”
After The DAO, the ether price declined by more than 50 percent over the next six months. Since then, it has gone on to completely destroy all previous all-time highs for the digital asset.
Palmer pointed out that The DAO also showed that Ethereum was not immutable because developers decided to offer hard-forking code for the purpose of bailing out those who were negatively affected by the whole fiasco. The vast majority of users followed this new chain to effectively take funds from the hacker and give them back to DAO token holders.
2 - A Lack of ICOs
According to Palmer, another reason the ether bubble could pop is a general lack of interest in future ICOs.
“If there isn’t a new ICO every week driving down the supply and increasing the price, then it could kind of self normalize,” said Palmer.
Having said that, Palmer does not see this happening anytime soon.
“I think it’s really everyone wants to get in on an ICO right now, and I don’t see any signs of it slowing down,” said Palmer.
3 - Network Splits
Another possible reason for a future drop in the ether price mentioned by Palmer was the possibility of future network splits. In the aftermath of The DAO, the network split into two different blockchains, known as Ethereum and Ethereum Classic. Those who did not want to return the hacker’s funds to DAO token holders are now found on the Ethereum Classic version of Ethereum.
In Palmer’s view, this sort of split could happen again.
“There are upcoming changes with Ethereum,” explained Palmer. “They want to switch to proof-of-stake. We don’t really know when that’s going to happen. The timeline isn’t concrete. But another thing is what if there’s another DAO situation? What if there is another situation where a buggy contract results in the loss of millions of dollars. Will Vitalik [Buterin] and the leaders of the Ethereum community do another hard fork and will that result in another network split where you end up with Ethereum Classic Two or something along those lines?”
Recently, a buggy smart contract led to a loss of over $10 million worth of ether for QuadrigaCX, which is a cryptocurrency exchange in Canada. There was not much discussion in the Ethereum community around forking the blockchain in an effort to return the lost funds to the exchange.
4 - Intervention by the SEC
A final possible reason for the ether price bubble to pop mentioned by Palmer during his video was action from the SEC. According to Palmer, it’s possible that the SEC could decide that many ICOs could be defined as the sale of unlisted securities to unaccredited investors.
“That’s totally possible,” said Palmer. “The SEC take this stuff seriously, and any of these ICOs that are selling tokens to people in the US run some very big risks in doing so if they cannot beat something called the Howey Test.”
In the United States, the Howey Test is effectively a way to figure out whether some sort of asset should be legally considered a security.
“What I want to stress though is it only takes one of those things to happen for this whole house of cards to come crumbling down because once the price crashes, investors lose confidence, and then developers are deterred from creating further ICOs, the whole thing comes undone,” concluded Palmer.
Picture from Wikimedia Commons.
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Kyle first used Bitcoin in 2011. By early 2014, researching and writing about Bitcoin had become his full-time occupation. Currently, he contributes regularly to Forbes and CoinJournal. His work has also appeared in Business Insider, VICE Motherboard, Nasdaq, and many other media outlets. Additionally, he provides a daily Bitcoin news recap via a newsletter and YouTube show (audio only version available via SoundCloud), which can be found at kyletorpey.com.