Cryptocurrency and blockchain-related initial coin offerings (ICOs) have exploded in the past six months, repeatedly setting records for speed and amount of capital raised for very early stage companies. Never before have private companies without revenue, a prototype product or even a completed proof-of-concept been able to access so much capital at so low a cost.
Commentators have decried the soaring valuations and stated the obvious truths that this market is unsustainable and regulation inevitable. Few, however, have asked the more interesting question of how the ICO market has been able to short-circuit the traditional framework of incremental innovation and develop a nearly instant market of significant depth.
An excellent Harvard Business Review article published earlier this year explains how things are supposed to work.
Truly foundational technologies like blockchain gain traction in single and small group use cases, proceed over longer periods of time to become substitutes for existing businesses and finally transform the way our economy or society is organized.
Business processes, existing regulation and political attitudes can make this process agonizingly slow. The authors of the piece, entitled "The Truth About Blockchain", argue that we should not expect to see dramatic change from blockchain for years and maybe even decades.
To date, adoption of blockchain by business has felt like it might follow this model, with many businesses hesitating to do more than study blockchain in proof-of-concepts that do not threaten to disrupt current processes.
Businesses, such as those that Medici Ventures has invested in, see more opportunity and are attempting to move quickly, but these are outsiders trying to break into markets with well-established incumbents.
So, what makes the cryptocurrency market for ICOs different? The short answer is liquidity.
A more thorough response is that cryptocurrencies are traded in a market with no existing players, a culture of disregard for regulation and a relatively closed system. All of these reasons, combined with the existing infrastructure of cryptocurrency exchanges, creates an enormous amount of liquidity for virtually any asset that can be represented as a cryptographic proof and transferred on a blockchain.
Cryptocurrencies have only existed since Satoshi Nakamoto published the bitcoin white paper in 2009. The relatively short window of time that any business could have been operating in this space means that there are few incumbents, and still fewer that would want to limit newcomers.
Most welcome the network effect of additional businesses in the space.
Still, the distributed nature of bitcoin and many of the other cryptocurrencies stems directly from a deep mistrust of government.
As a result, many in the space do not welcome any government intrusion and like to say that these cryptocurrencies cannot be regulated. Even those who might be willing to comply with the law, often cannot be certain which laws apply.
Regulators have not been helpful, either, offering conflicting positions and more uncertainty than anything else. Throwing current ICOs into this culture has meant that even ICOs which are not intended to be currency-like and are not distributed in nature will generally seek to avoid regulation.
In fact, the majority of ICOs over the past year have been for "utility tokens": coins that offer a purchaser the opportunity to purchase a good or service from the issuer. Many are more similar to gift cards or product discount coupons than to a distributed currency.
Most are careful to avoid being labeled a security.
The final, and perhaps most important, piece of this puzzle is the relatively closed market for cryptocurrencies and other crypto tokens.
Over the past two to three years, the potential of cryptocurrency and blockchain has become much more widely recognized, with over $1bn invested in related businesses during 2016.
As the value of bitcoin, ethereum and other cryptocurrencies continues to climb by hundreds and even thousands of percentage points annually, a great deal of money is entering the cryptocurrency system. At the same time, there are limited avenues to spend tokens on goods and services and still fewer participants who want to exit the crypto market.
Returns on other, more traditional investments, are much lower and financial institutions and regulators have created a sort of firewall anytime fiat currency is moved into cryptocurrency or back that severely restricts large movements of money into or out of this market.
Inside the cryptocurrency market, things are much different.
Exchanges have made it incredibly easy to move from coin to coin easily and at low cost. There are over 900 different altcoins that represent everything from equity in companies, various attempts to create a better currency, and products ranging from computing power to strip club memberships.
One of the most remarkable advances of these cryptocurrency exchanges is their willingness to trade virtually anything for anything else. Currency tokens can be exchanged for service tokens, which can be exchanged for equity or debt tokens.
The wealth effects from quickly rising currency values, the limited range of products that can be now purchased with cryptocurrencies and the ease with which investors or purchasers can move between tokens has created a large investment pool just waiting for something to buy.
Not only do these individuals believe in the value of the blockchain, they have experienced it and would like to buy more. So when a new product is tokenized and offered for sale in denominations of ethereum or bitcoin, there are many who are willing to purchase.
Most have rarely lost money in this market and only a few have ever experienced the frustration of being trapped in an illiquid asset like the stock of a private company.
In their world, if the token is not a winner, it can still be traded for something else.
There are many, myself included, who remain concerned about what will happen as this market grows up. We worry about the possibility of fraud, implications of large losses when the bubble bursts and how regulation will affect this unique and exciting "Wild West" atmosphere.
Until that shoe drops, however, I will remain impressed at what can happen when private companies find a way to tap into large amounts of investment money, and investors can find liquidity in tokens representing everything from computer storage to a bet in a prediction market.
Today's ICO market is a truly remarkable economic experiment.