Initial Coin Offerings and the Value of Crypto Tokens

25 Pages Posted: 13 Mar 2018 Last revised: 29 Mar 2018

Christian Catalini

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

Joshua S. Gans

University of Toronto - Rotman School of Management; NBER

Multiple version iconThere are 2 versions of this paper

Date Written: March 9, 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 future use of a digital platform — to fund venture start-up costs. We show that the ICO mechanism allows entrepreneurs to generate buyer competition for the token, which, in turn, reveals consumer value without the entrepreneurs having to know, ex ante, consumer willingness to pay. 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. Furthermore, by revealing key aspects of consumer demand, crypto tokens may increase entrepreneurial returns beyond what can be achieved through traditional equity financing. A lack of commitment in monetary policy can, however, undermine saving and, thus, the cost of using tokens to fund start-up costs is potential inflexibility in future capital raising. 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 (March 9, 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

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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