Decentralized Finance, Crypto Funds, and Value Creation in Tokenized Firms

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 primary and secondary markets for tokens. We compile a unique dataset that merges blockchain-based crowdfunding (or Initial Coin Offering, ICO) data with proprietary CF performance data. 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 themselves beat the market by roughly 2.5% per month. Outperformance is persistent, indicating that CFs generate abnormal returns because of their skills rather than luck. The positive valuation and performance effects for CF-backed startups and CFs are higher for CFs with more central investor networks.

Keywords: Crypto Funds (CFs), Initial Coin Offering (ICO), Decentralized Finance (DeFi), Blockchain-based Crowdfunding, Entrepreneurial Finance

JEL Classification: G24, G32, K22, L26