This past year has seen Bitcoin and other cryptocurrencies rise to dizzying valuations—Bitcoin, for example, rose 1500% in a year. In the last few weeks, the market for cryptocurrencies has become extremely volatile. Bitcoin has gained or lost more than 20% of its value over the course a few trading days multiple times. It is currently trading at about 70% below its peak value of only a few weeks ago. A similar market mania exists for companies associated with a related concept—blockchain technology. As an example, the Long Island Ice Tea Corp., a money-losing drink manufacturer, saw its share price increase by 289% in a single day when it changed its name to Long Blockchain Corp. and announced that it will seek to partner with companies that develop blockchain technology, a business it was not in and to which it had no obvious connection. Other companies are tapping into the irrational exuberance by bypassing normal market procedures and raising money through an Initial Coin Offering (“ICO”), a cross between issuing shares and creating a new cryptocurrency.
Putting aside for the moment the question of whether we are in the midst of a bubble, it is worth spending a few minutes understanding each of these innovations. After all, even if the bubble bursts, these innovations may well survive. First, some definitions:
