The Role of Technology and Network Externalities in the Long-Term Performance of ICOs

Abstract

This study examines the impact of technology and network externalities on exchange-listed Initial Coin Offerings (ICOs). ICOs are a new fundraising instrument used to finance technological innovation against a digital voucher or receipt. They diffuse the ownership of claim for a digital good. Utilising an online database comprising of self-reported ICO characteristics, measures of post-ICO performance, along with information on business social networks, higher fundraising figures are found to contribute to the ICO long-term success, but this impact is multiplied by six times when fundraising is conducted to existing, proprietary blockchain. This is explained by the network effect. The modified information ratio measure is used to approximate the quality signalling of ICO organisations using price timeseries and benchmarking these to already functioning blockchain technology, e.g. ethereum in the long-term. The ICO sample’s mean trading period on exchanges is 1.5 years and is used for long-period asset analysis. Additionally, the cointegration to the market technology benchmark is found to have a large, significant negative effect on long-term ICO organisational success as this indicates lower ICO intrinsic value.

The peer-reviewed, final version (Dec 2023) of this network effects study can be found here: https://www.sciencedirect.com/science/article/pii/S2773067023000079

Keywords: Initial Coin Offerings, Return Series, Networks, Financial Technology, Blockchain, Ethereum

JEL Classification: B26, D18, D47, G11