The Economics of Crypto Funds
66 Pages Posted: 15 Jun 2021 Last revised: 14 Apr 2022
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Decentralized Finance, Crypto Funds, and Value Creation in Tokenized Firms
Date Written: June 11, 2021
Abstract
Crypto Funds (CFs) represent a novel investor type in entrepreneurial finance. CFs intermediate Decentralized Finance (DeFi) markets by pooling contributions from crowd-investors and investing in tokenized startups, combining sophisticated venture- and hedge-style investment strategies. We compile a unique dataset combining token-based crowdfunding (or Initial Coin Offerings, ICOs) data with proprietary performance data of CFs. CF-backed startup ventures obtain higher ICO valuations, outperform their peers in the long run, and benefit from token price appreciation around CF investment disclosure in the secondary market. Moreover, CFs beat the market by roughly 2.5% per month. Their outperformance is persistent, suggesting that CFs deliver abnormal returns because of skill, rather than luck. These performance effects for CFs and CF-backed startups are driven by a fund's investor network centrality. Overall, our study paves the way for research on what some refer to as the ''crypto fund revolution'' in entrepreneurial finance.
Keywords: Cryptocurrency, Token Offerings, ICOs, STOs, Blockchain, Entrepreneurial Finance, Hedge Funds, Venture Capital, Decenrtalized Finance, DeFi
JEL Classification: G24, G32, K22, L26
Suggested Citation: Suggested Citation