Digital Tulips? Returns to Investors in Initial Coin Offerings

54 Pages Posted: 5 Jun 2018  

Hugo Benedetti

Boston College - Carroll School of Management

Leonard Kostovetsky

Carroll School of Management, Boston College

Date Written: May 20, 2018

Abstract

Initial coin offerings (ICOs), sales of cryptocurrency tokens to the general public, have recently been used as a source of crowdfunding for startups in the technology and blockchain industries. We create a dataset on 4,003 executed and planned ICOs, which raised a total of $12 billion in capital, nearly all since January 2017. We find evidence of significant ICO underpricing, with average returns of 179% from the ICO price to the first day’s opening market price, over a holding period that averages just 16 days. Even after imputing returns of -100% to ICOs that don’t list their tokens within 60 days and adjusting for the returns of the asset class, the representative ICO investor earns 82%. After trading begins, tokens continue to appreciate in price, generating average buy-and-hold abnormal returns of 48% in the first 30 trading days. We also study the determinants of ICO underpricing and relate cryptocurrency prices to Twitter followers and activity. While our results could be an indication of bubbles, they are also consistent with high compensation for risk for investing in unproven pre-revenue platforms through unregulated offerings.

Keywords: Initial Coin Offering, ICO, Token, Blockchain, Cryptocurrency, Venture Capital, Crowdfunding

JEL Classification: G30, G39

Suggested Citation

Benedetti, Hugo and Kostovetsky, Leonard, Digital Tulips? Returns to Investors in Initial Coin Offerings (May 20, 2018). Available at SSRN: https://ssrn.com/abstract=3182169 or http://dx.doi.org/10.2139/ssrn.3182169

Hugo E Benedetti

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chustnut Hill, MA 02467-3808
United States

Leonard Kostovetsky (Contact Author)

Carroll School of Management, Boston College ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

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