Peter Denious, head of global venture capital at Aberdeen Asset Management Plc, said were in the midst of a virtual currency bubble, and like all bubbles, it will eventually burst.

That doesnt mean investors should necessarily steer clear. Aberdeens venture capital arm, which has about $1.8 billion entrusted in early stage funds, is considering investing in funds that hold blockchain-based companies and digital coins, Denious said. Still, he said the cryptocurrency boom thats attracting millions into startups and spurring triple-digit gains in their digital tokens isnt sustainable.

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A lot of lessons will be learned and a lot money will be lost, before a lot of money can be made, Denious, who is based in New York, said in an interview. Prices right now arent being driven by network usage, theyre being driven by speculation that tokens are going to appreciate. Its a gold-rush mentality. The winners will be those who are really creating highly disruptive, network-based businesses.

Technology companies have raised $646 million this year in so-called initial coin offerings, more than six times the total raised last year, according to Coinschedule.com. The rapid surge in token prices, doubling on average since they start trading, has convinced investors to hand over millions to early stage developments in fundraising rounds that often close in minutes. The hype has driven coins for ethereum, the network on which many of the projects are built, to surge to about $300 from $8 at the start of the year.

All that hype is making Denious, and many others, a little skeptical. Digital currencies potential to disrupt venture capital is also raising flags.

Read more on how network congestion is hindering trading in digital coins

ICOs are allowing early stage companies to bypass venture capital. Denious said this funding mechanism will persist even after the market cools, but it will co-exist with VCs as token sales only make sense for companies that benefit from a blockchain-based decentralized network. Venture capital firms can also be more helpful in building companies, through expertise and connections.

So whats an institutional investor to do with a world-disrupting asset, thats also over-heated? Denious said hes focused on finding funds with expertise in the field and a good track record. He has talked to four or five funds focusing on blockchain-based companies so far, declining to name them.

Aberdeens interest is a sign that blockchain companies and their digital tokens have the potential to reach a wider investor base in the future. Denious said he doesnt doubt that will be the case.

The ingredients are all there for a new asset class, he said. Were in need of restoring what the internet initially offered, which is the power of decentralization. The power has re-centralized in the hands of a few market participants and this technology can disrupt that. The potential is exciting.

Link:

Aberdeen Says Cryptocurrency Bubble Will Burst Even If Coins Change Finance - Bloomberg