Are Blockchain Crowdsales the New “Gold Rush”?--Success Determinants of Initial Coin Offerings

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Digital, Innovation, Entrepreneurship & Financing
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Abstract
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  • ... They found that the presence of publicly avail-491 able coding effort, a presale event and a voluntary choice of a jurisdiction of 492 reference are all valid signals that encourage larger volumes of investments in the 493 ICO project. Amsden and Schweizer (2018) confirm that the presence of shared 494 coding repositories for the projects positively affects the probability of success, 495 while adding that social media presence (measured in terms of Telegram groups), 496 lower token retention rate and larger teams are also conducive to higher fundraising 497 success. Adhami and Giudici (2019) study the human capital of ICO teams and the 498 effectiveness of their governance signals. ...
    Chapter
    In this chapter we describe the phenomenon of Initial Coin Offerings (ICOs), i.e. unregulated offerings of digital tokens, built on the innovative blockchain technology, as to provide a means to collect finance for a project on the Internet, disintermediating any external platform, payment agent or professional investor. ICO tokens allow the access to platform services, may serve as cryptocurrencies, or grant profit rights; they are traded on electronic exchanges and represent a new financial asset. We highlight the issues emerged with respect to information asymmetries and moral hazard and we review the nascent empirical literature exploring the ICO token market.
  • ... This method allows ICOs to raise more funds than IPOs, making ICOs a more attractive alternative. In addition, Ryan Amsden (2018) showed that by underpricing ICOs, issuers can generate market liquidity, which increases demand for tokens. Since the value of tokens is determined by the number of users, the higher demand increases the tokens' inherent value. ...
    Article
    Initial Coin Offerings (ICOs) have become a popular way of fundraising for companies. While they can be highly profitable for both companies and investors, there is a large amount of risk involved due to their unregulated nature. Despite the vast majority of ICOs being scams, many individual investors still participate. This paper investigates why people invest in ICOs, using behavior finance biases. After analyzing white papers, ICO expert opinion and individual investors’ testimonies, the research found that the overconfidence bias and herd behavior & fear of missing out bias influences people’s decision to invest. Using the results, this study makes recommendations to help regulators decrease the influence of behavior finance bias.
  • ... Proposition 2 implies that ICO is preferred to STO if the market uncertainty increases or the discount rate decreases. Although this prediction has not been tested directly it is consistent with the spirit of Amsden and Schweizer (2018). They show in their sample of 1,009 projects between 2015 and 2017 that ICO success depends negatively on venture uncertainty and positively on venture quality. ...
  • ... The number of ICOs and the money raised through ICOs have increased considerably over the last years. A growing literature documents that the structure of the campaign, the characteristics of the entrepreneurial team, and the use of social media affect the capacity of firms to raise funds in ICOs (e.g., Amsden and Schweizer, 2018;Blaseg, 2018;Catalini and Gans, 2018;Chod and Lyandres, 2018;de Jong et al., 2018;Fisch, 2019;Howell et al., 2018;Lyandres et al., 2019). A distinctive aspect of ICOs is that they occur only online, as ventures communicate with investors by providing information on the campaign site. ...
    Preprint
    Working paper. SSRN link: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3428800
  • ... One of a small number of empirical studies on the ICO is by Benedetti and Kostovetsky (2018) who investigate returns and determinants of returns of ICOs. Another empirical research on the ICO is Amsden and Schweizer's (2018) study in which they develop a theoretical framework for determinants of successful ICOs. Adhami et al. (2018) also attempt to find factors that make an ICO a success. ...
    Article
    Purpose The purpose of this paper is to recognize the benefits of the initial coin offering (ICO) as a way of raising funds and to present a detailed comparison between the ICO and the initial public offering to realize the future possibilities that this new funding method holds. Design/methodology/approach It is an exhaustive review of the ICO, the mechanism of crowdfunding, the blockchain technology behind it, benefits and current shortcomings of the ICO, and the potential future development of the ICO as a convenient and efficient way of raising capital. Findings ICOs have brought billions of dollars of funding to startups and projects worldwide in less than two years. Concurrently, many successful ICOs yielded extremely high returns to investors and believers of this new way of funding businesses. Research limitations/implications While the ICO is a revolutionary vehicle for business funding, it has raised concerns among users as well as potential investors about its risk and lack of regulation. The future of this innovative funding method highly depends on further development and placement of appropriate regulatory supervision, better understanding of risk and benefits and attaining the confidence of users. Originality/value This is a review of the advantages and drawbacks of the ICO. If the current fraud, market and cybersecurity risks can be mitigated and standardized regulations are developed, the ICO has a future to become an established way of capital funding or even replace the existing options, regardless of the size and age of companies.
  • ... Additionally, rights can be associated with the token, ranging from access to or discounts for services and products to profit or voting rights. However, established trust-building intermediaries are largely absent and high information asymmetries complicate due diligence, a situation that has been exploited by several fraudulent TSs (Kaal and Dell'Erba 2017;Amsden and Schweizer 2018). For issuers, TSs offer a relatively easy and fast way to raise capital, to economize on fees otherwise charged by intermediaries, and to unilaterally specify investment terms. ...
  • ... As ICOs represent a rather young phenomenon, the academic research on the topic is limited. Amsden & Schweizer (2018) show in their sample of 1,009 projects between 2015 and 2017 that ICO success depends negatively on venture uncertainty and positively on venture quality. Overall, the term "success" is somewhat ambiguous, as it can be applied to funding success, venture success, secondary market access, or return on investment. ...
  • ... Nevertheless, a number of different funding sources and mechanisms that are tailored to the specific needs of entrepreneurs exists, such as Initial Public Offerings (e.g., Ritter and Welch, 2002), venture capital (e.g., Gompers and Lerner, 2004;Busenitz et al., 2005), crowdfunding (e.g., Mollick, 2014;Ahlers et al., 2015), business angels (e.g., Elitzur and Gavious, 2003), and now token offerings. Token offerings or Initial Coin Offerings (ICOs) are a recent phenomenon but the market is soaring (Adhami et al., 2018;Amsden and Schweizer, 2018;Momtaz, 2018Momtaz, , 2020b, even though it is plagued with a vast amount of scams (Kean, 2018;Shifflett and Jones, 2018). A limitation of the early literature on token offerings is its lack of conceptualization of token offering dynamics. ...
    Article
    Full-text available
    This paper provides the first evidence of a moral hazard in signaling in an entrepreneurial finance context, by examining token offerings or Initial Coin Offerings (ICOs). Entrepreneurs' ability to signal quality is crucial to succeeding in the competition for growth capital. However, the absence of institutions that verify endogenous signals may induce a moral hazard in signaling. Consistent with this hypothesis, artificial linguistic intelligence indicates that token issuers systematically exaggerate information disclosed in whitepapers. Exaggerating entrepreneurs raise more funds in less time, suggesting that investors do not see through this practice initially. Eventually, the crowd learns about the exaggeration bias through trading with other investors. The resulting investor disappointment causes the cryptocurrency to depreciate and the probability of platform failure to increase.
  • ... As ICOs represent a rather young phenomenon, the academic research on the topic is limited. Amsden & Schweizer (2018) show in their sample of 1,009 projects between 2015 and 2017 that ICO success depends negatively on venture uncertainty and positively on venture quality. Overall, the term "success" is somewhat ambiguous, as it can be applied to funding success, venture success, secondary market access, or return on investment. ...
    Preprint
    Full-text available
    Blockchain-based security token offerings (STOs) provide a new way of crowdfunding and corporate financing. Building on signalling theory, this paper examines 1) whether companies conducting an STO make use of cheap signals to influence investment behaviour and 2) if such use of cheap signals is effective. We analyse a dataset of 151 STOs and identify that cheap signals of human capital and social media are used by projects and have a positive effect on funding success, while cheap signals of external network size negatively affect funding success. We argue that these signals can be exploited by STOs to influence investor behaviour raising concerns for investor protection.
  • Chapter
    As the underlying technology behind Bitcoins, blockchains have attracted the attention of entrepreneurs, policymakers, and academics alike. Its potential to facilitate transactions, coordination without a central authority, and its capacity to support smart contracts are likely to open the door for its application to numerous settings. One of the more prominent applications is the clean energy sector. This chapter provides insights on how this novel technology that offers disintermediation, transparency, and flexibility is providing new ways of interaction to tackle challenges of communication, coordination, and efficiency in the clean energy sector. Along with providing a brief overview of the blockchain technology, we discuss some of the prominent clean energy applications of the technology, such as micro energy exchange grids, cap and trade, and electrical vehicle charging networks. Furthermore, the chapter includes empirical evidence on initial coin offerings (ICOs) launched by projects focusing on various aspects of development of renewable energy sector. We identify six prominent themes of services, namely, clean cryptocurrency mining, energy exchange, project financing, investment intermediation, network building, and hosting incentive programs. Furthermore, we find that clean energy ICOs tend to be more successful than other similar ICO projects.
  • Chapter
    Im ersten Schritt ist es wichtig, eine ICO- und vor allem eine blockchain-geeignete innovative Idee hervorzubringen, welche im Anschluss von den Entwicklern des jeweiligen ICO-Projekts über diverse Kanäle und Foren den potenziellen Investoren mit der Hoffnung vorgestellt wird, einen Hype auszulösen (vgl. Deloitte 2017).
  • Preprint
    要想理解比特币的经济现象之本质,我们很难对比特币的底层技术和治理机制避而不谈。事实上,由于跨学科门槛的存在,只谈现象,对加密货币底层经济逻辑的有限认知是现有文献的不足。本文认为比特币之所以能实现长久的去中心化运行,其根本原因在于它对哈希函数经济学特性的开发。哈希函数在调节算力成本方面高度的灵活性使得比特币得以摆脱物理世界的制度成本约束,而这可能给现有经济结构带来潜在的冲击。鉴于此,本文首先从经济学视角分析了比特币的底层技术(公钥加密、哈希函数)和机制设计,随后分析了比特币模式对传统经济的潜在影响,最后指出以比特币为首的加密货币行业的问题:监管、完全去中心化的局限及线上线下的对接问题。
  • Article
    Full-text available
    We apply a vector autoregression (VAR) model to investigate the market cycles of Initial Coin Offerings (ICOs) as well as their relationships with bitcoin and ether. Our sample covers 104 weekly observations between January 2017 and December 2018. Our results show that ICO market cycles exist and that shocks to the growth rates of ICO volumes are persistent. In addition, shocks in cryptocurrency returns have a substantial and positive effect on ICO volumes. In contrast, the volatility of cryptocurrency returns does not significantly affect ICO volumes. Our results are robust to using (i) the number of successfully completed ICO campaigns instead of ICO volumes and (ii) ICO data from a different data source. Our study has implications for financial practice, in particular for cryptocurrency investors and entrepreneurial firms conducting ICOs.
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