The CIO of a crypto hedge fund reveals why you should be cautious of the ICO bubble

Ari Paul, CIO of cryptocurrency hedge fund BlockTower Capital, talks with Business Insider executive editor Sara Silverstein about why he thinks investors should be cautious when investing in ICOs. Following is a transcript of the video. 

Sara Silverstein: And what about the ICO bonanza that we've been seeing? How do you feel about initial coin offerings?

Ari Paul: I think that one aspect of the cryptocurrency market is a lot like 1999. So, in the early '90s you great high quality projects coming to market. It wasn't viewed as a get-rich-quick scheme to launch a tech company in 1990. It was hard to raise money. By 1999 it was easy. And it was viewed as easy money on the investment side. So you had a lot of bad business ideas, a lot of early-stage projects, and a lot of investors who didn't know what they were doing throwing money, and you had a bubble. So in ICOs I think we see the same thing today. Which is we see a lot of really bad projects, that are worth nothing, and some great projects, that are still dramatically overvalued — for where they are in their stage of development. This goes in cycles. So ICOs are experimenting. They are best viewed as early VC stage projects. Like as in equities, most will fail — most should fail. That doesn't mean they're bad as a class. So as an investor though, right now I'd be very picky about ICO investing, but I'm grateful for the experimentation happening. And like in the tech boom, there going to be a lot of lessons learned from failed experiments that move the world forward.

Silverstein: And when you look at an ICO what are you actually — what does the company actually owe you if you sign up for one of these new tokens?

Paul: So generally nothing. First, there’s almost no case law on this. Many of the contracts are structured legally as donations. So I'm contributing either US dollars or sometimes cryptocurrency, maybe I send ether or I send bitcoin to the development team. And basically they say, “Maybe we'll send you something at some point. Maybe we'll send you a new cryptocurrency that we create, at some point in the future.” But they're not legally obligated to. Those contracts haven't really been tested in court yet. So frankly is an investor we don't know.

This video was originally published on December 6, 2017.