Some coins have imaginary (or optimistically, "future") value and some have real value. People trade away the imaginary value for the real value. That's what makes it real. Simple, right?

ICOs have diluted the crypto market cap with future (or imaginary) value, and until they (or at least some) pay it off by delivering on their promises, that value is destroyed. This is how inflation works, and there has been massive inflation lately, mostly in the Ethereum markets.

The ICO Bubble

A lot has been written about the coming ICO bubble and its effects. Still, people are confused today, asking "What is depressing cryptocurrency prices recently?"

Prepare to be shocked - it's the ICO bubbble you were repeatedly warned about.

TNSTAAFL

There's No Such Thing As A Free Lunch.

The simple truth is you can’t keep printing money without inflating its value

Bitcoin itself presented a solution to this problem - a money supply with a fixed increase in quantity over time as well as a fixed total quanitity. That meant predictable (and declining) inflation, with a predictable end to the inflation. If coin adoption (raising the value) outpaces coin inflation, the coin's value (as measured in weaker currency) becomes deflationary.

The bitcoin supply itself is inflationary. More is added every ten minutes; none is destroyed. At the current block reward rate, that means the supply is growing (inflating) by 4% per year. But unlike fiat money, bitcoin's inflation rate is entirely predictable, and known, and declining - to zero.

Not even other kinds of money?

When the first altcoins were proposed and launched, people had the same concerns as they do today with ICO tokens. The rise of altcoins at first diluted bitcoin's value. In expectation of a future value of those coins that was greater than the current value, people spent bitcoin acquiring them. Buying the coins set a price for the value of performing the work involved in mining the coins.

But mining the coins was real work, and when the coins exhibited utility, the market added that back to bitcoin by raising the price of the altcoin. The price rise offered early speculators in successful tokens the ability to trade back into a larger stake in bitcoin. This meant that the difference between the old price and the new price was added back to bitcoin's value. Failed altcoin blockchains represent a removal of value from bitcoin in the amount that their mining was rewarded, because it was wasted work.

Wasted work is the root cause of inflation.

Eventually some of those coins proved useful and sustainable in their own right. To the degree this was true, those coins stopped leaching value from bitcoin and started creating their own value. Not unlike paying back a loan, the true value that was added to the altcoin by its utility was returned to bitcoin by the reflected change in price. Which coin is (or will be) valuable and which is not is something the market continues to determine every day.

"POS" Tokens

After the proof of work altcoins came variants like Peercoin, offering a hybrid of proof of work, which rewarded traditional mining methods, and proof of stake, which rewarded holders for the size of their balances. Other development efforts aimed to skip proof of work entirely. The earliest, best-known example of an ICO for a pure POS blockchain token is NXT.

In many ways, NXT was the Ethereum of its time. NXT offered blockchain functionality that bitcoin and other chains in development only talked about, only dreamed about. NXT made those functions real, now. Things like token issuance, decentralized exchange, dividend payments - NXT made it cheap and easy.

Like bitcoin, users began to build side projects like web wallets, forums, news, apps, and of course - assets. Innovators like jl777 built popular apps around NXT and funded the apps via asset creation. In many ways, NXT was the main precursor of Ethereum. It seemed Ethereum had all the best functions of NXT, plus a few more advantages.

As much as it wavered, the price of NXT remained well above its ICO price. Generous distribution of tokens as bounties by early adopters helped spread adoption along. NXT never seemed to have much in the way of hype - certainly not compared to its functionality. Maybe that explains what seems like a perpetually low token price.

Hype is what Ethereum had in spades.

HYPE - How You Perceive Everything

Hype Machine - the New Proof of Work

With price determined outside markets based on incomplete information, the hype machine itself has become the new source of work that must be performed for a token to gain value. But there is little value for the token issuer in continuing this type of work after the ICO. And besides, they shouldn't.

The work that needs to happen after the ICO is the development of the platform.

Delivery on the pre-ICO promises is what will give any ICO tokens value in the end. Unless that work happens, the value of Ethereum (and bitcoin) will continue to drop as the bubble of each ICO's promises gets popped.

...more in the next post...