You're going to hear a lot about initial coin offerings (ICOs) in the coming months. As investors have poured more and more money into newly created virtual currencies, they have created a gold-rush mentality. In recent months, some ICOs have raised tens of millions of dollars, and in early October the cryptocurrency market as a whole was worth about $140 billion.

Some ICOs have been for serious projects trying to solve hard technical problems. Others seemed like little more than cynical attempts to cash in on the speculative boom. Celebrities like Paris Hilton, Floyd Mayweather, and Ghostface Killah have endorsed ICOs The launch video for the cryptocurrency Hilton endorsed, called LydianCoin, consisted entirely of cliches: "Purpose isn't defined by what you want to achieve but what you want to live for to achieve happiness." (Hilton has since deleted her tweet endorsing LydianCoin.)

But throughout 2016 and 2017, ICOs of all shapes and sizes have repeatedly set new fundraising records as existing cryptocurrencies like Bitcoin and ether simultaneously soared in value. Experts we talked to—like Peter Van Valkenburgh, an expert at a blockchain advocacy group called Coin Center—didn't think that was a coincidence.

"We're probably in a bubble," Van Valkenburgh told Ars in an early September interview. But even if the current boom does turn out to be a bubble, Van Valkenburgh argues that this isn't necessarily a bad thing.

"You can look at bubbles as being socially productive," he told Ars. Bubbles "allocate capital to long shot, paradigm-shifting innovation" instead of incremental improvements to existing technologies. The dotcom bubble created a lot of failed companies—but it also created Amazon, eBay, and Google.

The ICO boom is a classic speculative bubble

Paul Graham is a well-known Silicon Valley investor who co-founded one of the first e-commerce companies and then sold it to Yahoo in 1998. From there, he became a Yahoo employee, which gave him an inside look at the dynamics of the dotcom boom, which Graham described in a 2010 essay as a "de facto Ponzi scheme":

Investors were excited about the Internet. One reason they were excited was Yahoo's revenue growth. So they invested in new Internet startups. The startups then used the money to buy ads on Yahoo to get traffic. Which caused yet more revenue growth for Yahoo, and further convinced investors the Internet was worth investing in. When I realized this one day, sitting in my cubicle, I jumped up like Archimedes in his bathtub, except instead of "Eureka!" I was shouting "Sell!"

Something very similar has been happening in the Blockchain world, and this story begins with Ethereum. Today, it's the second most popular cryptocurrency after Bitcoin. Ethereum's cryptocurrency, called ether, was offered for sale months before the launch of the Ethereum network. The presale concluded in August 2014, and it turned out to be a phenomenal deal for buyers. Since the July 2015 launch of the Ethereum network, the value of ether has risen more than 200-fold.

Seeing this success, a lot of other cryptocurrency founders have followed this approach in the last two years. The strategy has come to be known as an initial coin offering.

ICO founders tend to come from within the cryptocurrency world. Blockchain investors are more likely to take a project seriously if it's led by veterans of previous projects. Founders usually follow the template set by Ethereum: the project's vision is laid out in a white paper that describes how the new network protocol will operate. They set up a website with instructions for registering for the ICO and sending money—usually in the form of Bitcoins or Ethereum—to the company. ICOs generally run for a few days, but some of the most popular ones have been halted within hours or minutes as they became over-subscribed and quickly reached their fundraising target.

People buy into new ICOs in the hopes of getting in at the ground floor of the next Bitcoin or Ethereum, just as investors in the IPOs of the late 1990s hoped they were buying shares in the next Yahoo. But the parallels to the dotcom boom don't stop there.

Legal and technical obstacles make it tricky to directly sell a new cryptocurrency for dollars, euros, or other conventional currencies. So ICOs almost always use bitcoins or ether as a medium of exchange. People first convert their dollars into bitcoins, then use the bitcoins to buy the new cryptocurrency. That creates demand for bitcoins, pushing up their value.

And that's not all. The Ethereum blockchain is a general-purpose computing platform, and a lot of the new tokens being offered for sale are actually built on top of the Ethereum blockchain. It takes ether to run software on the Ethereum network, so the more projects are built on top of Ethereum, the higher the demand for ether.

The result is a powerful feedback loop. Token creators point to the success of the Ethereum presale as evidence that token presales are a good investment—much as startup investors in the 1990s pointed to Yahoo's success to justify their own fundraising. At the same time, growing ICO activity boosts demand for ether (and Bitcoin), creating an even greater sense of momentum in the blockchain world as a whole.

This feedback loop is likely one of the reasons the price of bitcoins and ether soared over the last year. At one recent point, the price of Bitcoin had risen six-fold from a year earlier, while the price of ether had risen by a factor of 20 in one year.

The rising price of Bitcoin and Ethereum also means that early investors in these currencies have a lot of paper profits they can throw at new projects—just as dotcom millionaires often became investors in subsequent ventures. "There's a lot of new wealth," blockchain investor William Mougayar told Ars. "Everyone who's gaining from it is being very generous, they're re-circulating the gains into these ICOs."