Initial Coin Offerings and the Value of Crypto Tokens

34 Pages Posted: 13 Mar 2018 Last revised: 25 Jun 2018

Christian Catalini

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Joshua S. Gans

University of Toronto - Rotman School of Management; NBER

Multiple version iconThere are 2 versions of this paper

Date Written: June 25, 2018

Abstract

This paper explores how entrepreneurs can use initial coin offerings - whereby they issue crypto tokens and commit to accept only those tokens as payment for their products - to fund venture start-up costs. We show that the ICO mechanism allows entrepreneurs to generate buyer competition for the token, giving it value. We find that venture returns are independent of any committed growth in the supply of tokens over time, but that initial funds raised are maximized by setting that growth to zero to encourage saving by early participants. Nonetheless, since token value depends on a single period of demand, their ability to raise funds is more limited than traditional equity finance. A lack of commitment in monetary policy does, however, undermine saving, and therefore the cost of using tokens to fund start-up costs is inflexibility in future capital raises. Crypto tokens can also facilitate coordination among stakeholders within digital ecosystems when network effects are present.

Keywords: crypto tokens, blockchain, cryptocurrency, initial coin offering, entrepreneurial finance, crowdfunding, equity financing, monetary policy, network effects.

JEL Classification: E42, L12, L26

Suggested Citation

Catalini, Christian and Gans, Joshua S., Initial Coin Offerings and the Value of Crypto Tokens (June 25, 2018). MIT Sloan Research Paper No. 5347-18; Rotman School of Management Working Paper No. 3137213. Available at SSRN: https://ssrn.com/abstract=3137213 or http://dx.doi.org/10.2139/ssrn.3137213

Christian Catalini (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-480
Cambridge, MA MA 02142
United States

HOME PAGE: http://mitsloan.mit.edu/faculty-and-research/faculty-directory/detail/?id=58777

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Joshua S. Gans

University of Toronto - Rotman School of Management ( email )

Canada

HOME PAGE: http://www.joshuagans.com

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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