Limitations in an Imitation Game: Lessons from another Bitcoin Copycat
Daniel Cahill - University of Western Australia
Zhangxin Frank Liu - The University of Western Australia Business School
-- When a revolutionary technology is introduced, markets are typically met with high uncertainty, as the new technology is ambiguous and its future implications are unclear. Coupled with this ambiguity, the flurry of new entrants providing investment opportunities to interested audiences lack proven track records or assets to guarantee the risk of investment. Since potential investors have deficient information in a novel market, an organization’s name may serve as a symbol that influences investors’ decisions, particularly if that name is familiar within the market category.
In our recent paper, "Limitations in an Imitation Game: Lessons from another Bitcoin Copycat," we use the cryptocurrency market for its interesting narrative and investigate imitation of the leader’s (Bitcoin) name. We suspect at least two narratives contributed to Bitcoin’s success. Having been introduced during the 2008 financial crisis stirred anarchistic ideologies regarding trust in intermediation, giving Bitcoin a compelling story among systematically failing financial institutions. Bitcoin’s unprecedented gains also conveyed a narrative of ‘rags to riches’, evidenced by spectacular gains in short periods, incentivizing new entrants and investors to gain exposure to the fast-paced phenomenon. The novelty and uncertainty in the cryptocurrency market provides a useful environment to gauge the importance of symbolic information on performance. Coupled with the compelling narrative, cryptocurrency markets exhibit limited regulation and are highly uncertain. These factors play a role in imitation as uncertainty is a force that encourages mimicry (DiMaggio and Powell, 1983) and lagging regulation struggles to limit imitation.
Our categorization of imitating cryptocurrencies is simple. We define a cryptocurrency as a copycat if its name is similar to Bitcoin by including “bit” or “coin” in the name, and those without these similarities as non-copycats. Bitcoin was made a clear leader in cryptocurrencies and set the stage for new entrants, from its innovation in the proof of work consensus, coupled with the advent of the global financial crisis. Whilst the choices made by new entrants to imitate Bitcoin’s name could be unconscious, we suspect that the similarity in name does not necessarily imply a cryptocurrency mimics Bitcoin’s function, rather it mimics the narrative on distrusted intermediation. Our results hold robust using an alternative definition of copycat, which captures how similar the spelling of the name to the term bitcoin.
Since greater uncertainty is a consequence of new technology, we argue investors aim to simplify decisions by relying on semantic information to alleviate the complexity of choosing among thousands of cryptocurrencies. In the environment set by cryptocurrencies, we expect imitation to play a role in reducing information asymmetry, since much of the unfamiliar terminology to investors is difficult to comprehend.
Our findings show that copycats exhibit superior short-term performance compared to non-copycats. For longer windows (greater than one month) we do not observe distinguishably different performance. If we partition our sample into pre- and post-bubble periods we find that copycats continue to exhibit higher returns. Given Bitcoin had existed for close to a decade relative to our post-sample period, we expected a mature market to recognize the idiosyncratic benefits of currencies and downplay the role of symbolic information such as a name. However the influence of semantic information appears to be more influential compared the period before the bubble, indicating the market did not learn or it became saturated with new investors in a short period of time. Although copycats have superior performance for the first month of trading, we find their survival rate to be significantly lower compared to non-copycats. Approximately 40% (22%) of copycats (non-copycats) dropped out of our sample within the first year of trading.
In the subsample analysis, imitators have much higher initial returns than non-copycats in the post-2017 sample, whereas the difference in initial returns between the two groups is less pronounced between 2013 and 2016. Given Bitcoin had existed for close to a decade relative to our post-sample period, we would have expected a mature market to recognize the idiosyncratic benefits of currencies and downplay the role of symbolic information such as a name. However the influence of semantic information appears to be more influential, indicating the market did not learn or became saturated with new investors in a short period of time.
Whilst the benefits to imitation may signal legitimacy (Glynn and Abzug, 2002) that can help new ventures accumulate wealth and resources (Santos and Eisenhardt, 2005), our findings show that imitating a leader’s name in an uncertain environment may not yield long-run benefits. Overall, we find superior performance among imitators within the first month of trading, without improving long-term survivability. Having a name similar to Bitcoin may portray the narrative on distrust among intermediaries, reducing information asymmetry for new investors in a nascent market.