• Lauren Rhue

An empirical analysis of initial coin offerings – a call for trust


Decentralization continues to transform the opportunities to raise capital. Through initial coin offerings (ICOs), companies can use blockchain to issue their own virtual currency by generating the code for the cryptocurrency smart contract. Because cryptocurrency contracts are immutable, companies must decide on numerous dimensions of their issued currency at the time of launch: whether the currency will be mineable like bitcoin, whether the total supply will be fixed, the units of the currency, and so on. Despite the myriad of decisions that issuers face, there is limited guidance for these decisions, so my recent paper, “Trust is All You Need: An Empirical Exploration of Initial Coin Offerings (ICOs) and ICO Reputation Scores,” provides empirical insights for cryptocurrency issuers using data from multiple platforms: Coin Market Cap, a cryptocurrency benchmarking site; ICO Drops and ICO Ratings, ICO analysis sites; and Etherscan, an explorer for the Ethereum blockchain.

Described as a hybrid of an initial public offering (IPO) and a crowdfunding campaign, an ICO poses unique opportunities and risks for both companies and investors. The currencies issued through the ICO process only have value in the issuers’ ecosystem, similar to how an airline’s frequent flyer miles are only redeemable with that airline and its affiliates. By issuing currency, companies can attract millions of dollars from the public without the legal and financial restrictions associated with an IPO.

These newly issued currencies attract investors who believe that the underlying value of the goods and/or services will rise, and they can either redeem the token for a higher value product in the future or sell the token for a higher price in the secondary market. Thus, investors can directly finance start-ups and receive a substantial return on their investment, but these investments are risky because the quality of cryptocurrencies are hard to judge.

From this analysis, it is clear that ICO quality matters for success. A high number of bugs in the smart contract, a sign of poor coding quality, is associated with lower market capitalization ICOs, while corporate websites and other informational material for investors produce higher ROI and higher market capitalization ICOs. A strong reputation is associated with higher market cap and higher ROI for investors. One challenge is the potential endogeneity of reputation—a quality ICO receives a higher rating, but the higher reputation could also influence the perception of the ICO and its attractiveness as an investment vehicle. How reliable is ICO reputation, actually?

To that end, my paper examines ICO reputation across multiple data sources. Surprisingly, it finds that the ICO reputations are not correlated across data sources, highlighting the challenges faced by investors in finding reliable reputational information about ICOs. There is low coverage for ICO reputations across the three data sources; despite hundreds of ICOs listed across all the sources, only 22 ICOs are rated in all three sources. Of those 22 ICOs, the same ICO is labeled as very positive by one source and very negative by another. With a 0.03 correlation among the reputations, investors face a daunting challenge in attempting to determine worthwhile investments.

Trust is the bedrock of digital, economic transactions. We need additional empirical analyses of the ICO landscape and more reliable information about cryptocurrency tokens to facilitate trust in this emerging tool.

Lauren Rhue


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