Digital Déjà Vu – ICOs and 17th Century Treasure Hunters

ICOs and Treasure Hunters

Cryptoasset markets are often thought of as innovative, which is true in some cases, but not all. Slow processes and regulation can certainly be frustrating, but market participants should always be careful to not be blinded by neophilia, or a love of novelty. In this article we show that the growth of finance in England in the late seventeenth century, and the craze in Initial Public Offerings (IPO) that it gave rise to, provides a direct parallel with the Initial Coin Offering (ICO) craze that swept cryptoasset markets in 2017.

The late seventeenth century was a period of swashbuckling and piracy. In the late 1680s the Duke of Albemarle assembled a group of investors to form a joint stock company to fund and expedition under Captain William Phipps to search for treasure near modern day Cuba. While it is difficult to put a date on the first joint stock companies, it was still a novel concept in England at the time. The idea had arrived from Holland along with several other financial innovations such as sovereign bonds, which Holland had first adopted in 1517, and stock exchanges, one of the first of which was the Amsterdam stock exchange, which had been established in 1602.

In late 1686 Phips discovered the wreck of a Spanish ship and recovered 34 tons of treasure, which yielded the investors a 10,000% return on their original investment. This sparked a craze in diving companies with some IPOs rising 500% after listing. The mania for diving stocks translated to other companies promoting newly patented technologies including linen, paper, burglar alarms and even a system that used lights for catching fish. For example, the White Paper Company tripled, and the Linen Company quadrupled in value during the four years after their IPO. Even celebrities became involved: Daniel Defoe, who went on to write Robinson Crusoe, invested in, and became treasurer of a diving company.

Cryptoasset markets had a similar experience with the craze in Initial Coin Offerings (ICO). This is a form of fundraising using cryptoassets that many innovative companies used to raise capital, which started on the Bitcoin network with the ICO of Mastercoin in 2013. Ethereum was also originally funded through an ICO, which took place in 2014 and raised over $17m. ICOs were not limited to digital asset projects: Brave, a new internet browser, raised $35m in approximately 30 seconds after launch. In all, the ICO craze saw some 800 companies raise a total of about $20 billion. Similarly, celebrities such as Paris Hilton and Floyd Mayweather became involved, endorsing some ICOs. Mayweather’s promotions included a message to his Twitter followers that Centra’s ICO:

“Starts in a few hours. Get yours before they sell out, I got mine…”

The crash in 1696 was significant. 70% of companies that had been listed in 1693 companies went under. Tighter regulation swiftly followed. To dampen speculation the number of market makers (jobbers) and brokers was limited to 100, proprietary trading was forbidden, and high commissions were abolished. Similarly, to bring the ICO craze to an end, the SEC asserted its jurisdiction in 2017 and pursued high-profile cases against issuers and endorsers, including Block.one who settled charges related to the ICO of EOS for $24m. Consumer warnings were issued by regulators in Australia, Switzerland, and the UK, and ICOs were banned in places like China and South Korea.

In the end, Floyd Mayweather settled with the SEC for the sum of $615k. Daniel Defoe was not as fortunate. He lost his fortune after a further speculation failed, this one involving civets, and became a lifelong critic of financial speculation. However, he started his writing career the year after the crash in 1697 so it can be argued that his failure in the markets was a net benefit to mankind.

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