A study from Boston College shows that ICO investors are compensated handsomely for investing in new unproven platforms through unregulated offerings. Findings suggest that scams, while plentiful in number, are not as important in terms of stolen capital because investors are shrewd enough to spot (and underfund) them. The paper also shows how ICOs are both similar to and different from IPOs. Regulatory uncertainty in the United States and around the world has recently slowed the explosive growth in ICOs, but results suggest that while regulators should continue to deter fraudulent activities, they need to be careful not to throw out the baby with the bathwater.
The study used a dataset of 4,003 executed and planned ICOs, which raised a total of $12 billion in capital, nearly all since January 2017. Researchers Hugo Benedetti and Leonard Kostovetsky from Boston College’s Carroll School of Management found evidence of significant ICO underpricing, with average returns of 179% from the ICO price to the first day’s opening market price, over a holding period that averages just 16 days. Even after imputing returns of -100% to ICOs that don’t list their tokens within 60 days and adjusting for the returns of the asset class, the representative ICO investor earns 82%.
After trading begins, tokens continue to appreciate in price, generating average buy-and-hold abnormal returns of 48% in the first 30 trading days. They also studied the determinants of ICO underpricing and relate cryptocurrency prices to Twitter followers and activity. While the results could be an indication of bubbles, they are also consistent with high compensation for risk for investing in unproven pre-revenue platforms through unregulated offerings.