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This is a post written and narrated by Haseeb Qureshi, a cryptocurrency investor and entrepreneur. Haseeb is speaking at an upcoming Software Engineering Daily Meetup. We can safely say the ICO bubble is over now. When the bubble finally popped last year, the “market cap” of all crypto fell over $700B, an 85% drop from its peak in January — steeper than the dotcom bubble’s 78% crash. The media gawked at this collapse, and as usual, proclaimed this was the nail in the coffin for cryptocurrencies. There’s already been enough hysterics and I-told-you-sos. In this essay, I just want to answer the simple question: Why did the ICO bubble happen? It’s easy to believe that the ICO bubble, having taken place on uncensorable public blockchains, was a fundamentally new phenomenon. The technologies that enable bubbles are always new, but the underlying social dynamics are not. The open and permissionless nature of blockchains allows anyone to co-opt them. Thus, blockchains enabled multiple social forces, all interacting in the same network, all reified under the name “the ICO bubble.” In this blog post, I’ll examine three major moments in history that illuminate three separate social dynamics that were at play in the ICO bubble. The first is the peer-to-peer file sharing revolution in the late 2000s, which explains the ideology of decentralization, the proclamations of revolution, and companies trying to circumvent securities laws. The second is the penny stock boom of the 90s, which explains the casino of shitcoin gambling, market manipulation, and fraudsters that comprised the long tail of ICOs. And the third is the dotcom bubble, which explains the mass of speculators, the new paradigm of decentralized companies, the VC coins, and the redistribution of wealth. By exploring these episodes, I hope to show you how the ICO bubble recapitulated well-known patterns of human behavior. History does not repeat, but there are a few refrains it loves to come back to. I. The file sharing revolution Bitcoin shares deep roots with the P2P networks. File sharing protocols became the world’s first global decentralized networks. Bitcoin’s gossip-based networking model was inspired by Gnutella, the protocol behind LimeWire. Many P2P barons were foundational to the crypto movement: Jed McCaleb of eDonkey2000, Zooko Wilcox of Mojo Nation, and Bram Cohen of BitTorrent to name a few. They also share a philosophical lineage — Lawrence Lessig, the intellectual godfather of piracy culture, is the originator of the phrase “code is law.” The P2P file sharing revolution began in 1999, with a little application called Napster. On its face, Napster was straightforward: log in, search for a song you want, double click, and it’s yours. It sounds simple, but it’s hard to describe how large of a paradigm shift Napster was. Remember what it was like to purchase music in 1999: standing in a CD aisle, surrounded by rows of disc jackets, debating in your head which album to spend your $20 on. Jay-Z? Smashmouth? Or maybe J-Lo? Every purchase was a careful tradeoff. Music was scarce and precious. Napster changed all that. It was like a bank vault of music was propped open, free for anyone to plunder. Entirely via word of mouth, Napster spread across America like a riot, clogging up bandwidth on college campuses and dialup lines. Soon, legal challenges from Metallica and Dr. Dre would thrust Napster into news headlines. Napster seized the national conscience. At its peak in 2001, the service had more than 80M registered users. The RIAA took notice. After a lengthy court battle with the RIAA, a judge ruled Napster liable for all of its users’ copyright infringement, despite the fact that Napster’s servers didn’t host any copyrighted content. This legal doctrine, known as vicarious infringement, was the death knell of Napster and of any file sharing-based business model. Napster was driven to bankruptcy and forced to clamp down on all illegal file sharing. But Napster’s surrender was only the beginning of this war. To the digital revolutionaries, the lesson of Napster was obvious. Despite all downloads being peer-to-peer, Napster operated a central server, primarily used for search indexing and peer discovery. This was its downfall. If the file sharing revolution were to continue, it would have to decentralize and become resilient to legal injunctions. A traditional war had to evolve into guerrilla warfare. Decentralized alternatives to Napster gradually arose, intentionally designed around this legal constraint. Successors like Gnutella (LimeWire) and eDonkey2000 (eMule) would have decentralized architectures that would be much more difficult to take down. As the children of Napster proliferated, a philosophy began to solidify around internet piracy. Slogans materialized: “information wants to be free,” “open culture,” “sharing is caring.” A new political party called The Pirate Party was formed, championing online freedom and copyright reform, winning multiple political appointments across Europe. Radical innovations in intellectual property were explored such as the Creative Commons and copyleft licensing. The revolution had gained an energy and identity of its own. BitTorrent, founded by Bram Cohen in 2001, would arguably be the last stage in the evolution of P2P file sharing. The BitTorrent protocol overtook KaZaA, Limewire, DC++, SoulSeek, and all the other P2P networks. By 2012 it’s estimated to have peaked at a staggering 400M-500M monthly active users, almost half of the entire Facebook userbase at that time. During its peak, BitTorrent was by far the single largest source of Internet traffic in the world. It’s worth asking: why did BitTorrent dominate file sharing while other networks fell into irrelevance? BitTorrent’s power Simon Morris, a former executive at the BitTorrent company, wrote an excellent four-part tour de force analyzing the parallels between BitTorrent and crypto (if you can’t be bothered to read the whole thing, I encourage you to read its final chapter). I’ll be building upon many of his insights here. BitTorrent was intentionally structured differently from other P2P file sharing projects. The project’s original home page begins its explanation of BitTorrentlike this: BitTorrent is a free speech tool. BitTorrent gives you the same freedom to publish previously enjoyed by only a select few with special equipment and lots of money. (“Freedom of the press is limited to those who own one” — journalist A.J. Liebling.) It is a surprisingly dry, intellectual manifesto. Compare this to KaZaA’s credo: Bram Cohen explicitly disavowed all illegal file sharing usage of BitTorrent. He never once acknowledged this as a legitimate use of the service. The core team and their messaging was unimpeachable. And this is precisely what allowed BitTorrent to flourish on the back of all of its legitimate uses: Linux distros, World of Warcraft updates, dataset sharing, and so on. BitTorrent was never supposed to be a revolution in internet piracy; it was supposed to be a revolution in low-cost file distribution. This unobjectionable mission statement made BitTorrent safely beyond the reach of the RIAA or any other aggrieved copyright holder. There’s a striking parallel with crypto: Vitalik and the Ethereum core team never endorsed the flood of ICOs — they often denounced them. This is precisely what allowed Ethereum to flourish, despite being subverted by ICOs for speculative and extralegal purposes. If Ethereum did not brand itself as a revolution in decentralized computing, as “the world computer,” it would have been labeled by regulators as an illegal ICO platform. If you fast forward to today, the story of P2P file sharing is the story of BitTorrent. All other protocols have faded into obscurity. But BitTorrent is no longer used for downloading music in the western world. Why not? I’ll give you three reasons: Spotify, Apple Music, Pandora. Newcomers in the music industry have adapted, and these services transformed the experience of discovering and listening to music. P2P file sharing once competed against the experience of driving to Walmart and buying a $20 DRM-protected CD to listen to a single hit song. Between the two options, the decision was comically easy: just pirate it. Daniel Ek, the former CEO of uTorrent, understood this firsthand. After witnessing the new decentralized file sharing networks replace Napster, Ek came up with the idea for a company he’d eventually name Spotify: I realised that you can never legislate away from piracy. Laws can definitely help, but it doesn’t take away the problem. The only way to solve the problem was to create a service that was better than piracy and at the same time compensates the music industry — that gave us Spotify. Today P2P file sharing has significantly declined. But make no mistake: the digital piracy revolution moved industries. It forced music and film to cater to a digital-first world and eventually incentivized the invention of web streaming. The companies that didn’t adapt are now footnotes in history. Those that did will get to build the media dynasties of the next decade. The lesson of P2P file sharing If you listen to Lawrence Lessig or Peter Sunde, it’s easy to assume the file sharing revolution was rooted in ideology. But few file sharing veterans are still committed to piracy today. Trying to explain file sharing by appealing to intellectual property reform is like trying to explain the Boston Tea Party by appealing to John Locke. Ideology, while important, is usually post hoc. The real story is much simpler than that. The file sharing revolution took off because people opposed a rule: you can only consume music how the record industry says you can. People hated this rule. So they broke it. And P2P protocols enabled this great, overwhelming mob of rule breakers to demonstrate the way they thought music ought to work. Today, music works that way. No matter where you are, by doing a search and double clicking, you can listen to almost any song ever created. Simon Morris claims this was the raison d’être of BitTorrent, and of decentralized networks more generally. Decentralization allows rules to be broken. And when a rule is opposed widely and strongly enough, people will build the technology to break that rule, and that technology will spread. Without this sort of rule-breaking (whether by accident or design) it’s quite hard to imagine why decentralized blockchain technology even matters. It’s a distributed data store with a complicated and slow update mechanism… The one value proposition that everyone seems to agree on for blockchain technologies is that they are ‘censor-proof’. And this matters only if you have something that someone wants to censor. Every rebel wants a cause So why did ICOs need to be decentralized? Why couldn’t the bubble have kicked off through equity-backed blockchain startups like in the dotcom bubble? To Simon Morris, the answer is obvious: because ICOs were not just about the chance to invest in speculative blockchain projects. They were also about breaking rules: the rules around capital formation. This begs the question, why do people want to break the rules around capital formation so badly? The answer is complicated. Consider the initial conditions of the ICO bubble. The bubble was primarily driven by countries in Asia with high savings rates and income inequality — China, Japan, and Korea. Over the last decade, we’ve seen income inequality rising, declines in wage growth for the global middle class, waning trust in governments, and a mass of overeducated young people with shrinking opportunities. The ICO bubble was a loud rattling of this cage. The most massive wealth creation events in the world took place over the last decade — but it all went to other people. You didn’t get any. This new wave of technology has subjugated your digital life and attention span, but its fruits belong to the capitalists in Silicon Valley, not you. The ICO bubble let young people convince themselves: hey, maybe I can get my share. I see this Bitcoin thing, I see this Ethereum thing, they’re so novel and revolutionary, why couldn’t they change the world? And wouldn’t they get just a little convinced that for once, they were a step ahead of their parents, ahead of the gatekeepers, ahead of Wall Street and Silicon Valley? So they got in early. They started using VPNs. They got friends and family to create overseas accounts. They broke the rules. And what were those rules good for anyway, besides rigging the system for the rich? Why couldn’t anyone in the world invest in whatever they wanted? Who needs disclosures anyway, if the future is going to be open source? The market kept proving them right. So they speculated, they joined Subreddits and debated ideas and convinced themselves that their investments would revolutionize the world’s infrastructure. A decentralized future was fast approaching, and they were going to be, for once, at the vanguard ushering it in. And of course, when reality finally caught up, it showed them the consequences of breaking those rules. 2018 brought everything crashing down, laying bare all the scams, frauds, and widespread market manipulation. A once ecstatic market flattened out like a pancake. And here we must also acknowledge the other side of the market: entrepreneurs. To them, ICOs represented a great equalizer. After all, ICOs were dispersed internationally, and venture capital is still hard to come by outside of Silicon Valley. In the age of the Internet, in the age of blockchain, why hadn’t technology already leveled the playing field? Why should it matter where an entrepreneur lived or what language they spoke, so long as they knew the language of programming? With ICOs, you didn’t need an intro to Sequoia to get your company started. Now you simply needed a good idea and a white paper, and the world’s capital would beat a path to your door. Remember all the stories of VCs quaking in their Patagonia vests, worried that they were being displaced? And then there were the reverse ICOs, where established companies ICOed their own token, as in the case of Kik or Kakao. This is perfect if you want to fund an internal blockchain-related initiative, but skip all the burdensome overhead of shareholder protections or revenue generation. Even among startups funded by Y Combinator, the hottest accelerator in the world, I heard reports that a startling number of them were pondering ICOs. Even Silicon Valley elite wanted to break the rules! In this case, they wanted a way out of their illiquid startup ownership, and speculators were all too happy to provide it to them. It was only in retrospect that they would each realize why these rules were there in the first place. Once again, crypto relearned the lessons that traditional finance had long ago internalized. The revolution that cried wolf Let’s grant that the ICO bubble was instigated by a desire to break the rules around capital formation. Today, with the dust having settled and the ICO bubble now an awkward memory, we can reexamine its battle cries with more clarity. Did people really care about changing the rules around capital formation? Did they really care about democratizing investing access? Did they really care about reforming accredited investor laws, financial disclosures and AML/KYC requirements? Many intellectual commentators rallied against these during the run-up, but this too was probably just part of the frenzy of revolution. I don’t see much clamoring for this in 2019. As for the file sharing revolution — copyright law is, for all intents and purposes, mostly intact 20 years later. So what does the file sharing revolution tell you about the ICO bubble? First, it tells you that you should not take ideology at its word. The underlying causes of revolutions are usually more pragmatic than they appear. It also explains the supply side for ICOs, companies that wanted to c…
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Cryptocurrencies today serve two purposes: store of value and speculation. 
