The ICO Rating Game: Biased Ratings of Crypto Experts in Initial Coin Offerings

Abstract

We investigate the biases of crypto experts in providing ratings in ICOs. We conjecture that experts are incentivized to provide optimistic ratings to promote ICO fundraising success due to their future opportunities as advisors in subsequent ICOs. Using ICO ratings on ICOBench.com during the period of 2016 to 2019, we find that expert ratings in ICOs exhibit systematic optimism relative to the algorithm-generated objective ratings, and experts who give optimistic ratings to a greater number of fundraising successful ICOs are more likely to be hired as advisors in subsequent ICOs. Further, we find that ICOs with more optimistic expert ratings and ICOs hiring experts as advisors are associated with greater likelihood of short-term fundraising success but not long-term success. The findings suggest that the incentive of crypto experts and the associated optimism in their ratings help ICO startups raise funds but do not help crypto investors in achieving competitive outcome.

Keywords: Initial Coin Offering, Wisdom of Crowds, Crypto Experts, Incentives, Ratings, Optimism

JEL Classification: G1, G2, G3, M4