Transcription
The Wisdom of Crowds and Information Cascadesin FinTech: Evidence from Initial Coin OfferingsJongsub Lee, University of FloridaTao Li, University of FloridaDonghwa Shin, Princeton University18th FDIC/JFSR Bank Research ConferenceSeptember 6, 2018
MotivationI Initial coin offerings (ICOs) have become a popular way to fundblockchain-related startups.I An entrepreneur creates and sells a virtual currency or “token” toraise capital.I Tokens can be traded in the secondary market.
MotivationI Initial coin offerings (ICOs) have become a popular way to fundblockchain-related startups.I An entrepreneur creates and sells a virtual currency or “token” toraise capital.I Tokens can be traded in the secondary market.I Information asymmetry between an entrepreneur and outsideinvestors can hinder successful fundraising (Akerlof, 1970; Lelandand Pyle, 1977).I Traditional IPOs are delegated to financial intermediaries.I In ICOs, finacial intermediation is absent by design thanks todecentralized bookkeeping enabled by blockchain technology.I ICOs tend to rely heavily on the “wisdom of crowds” – the collectiveaction of a large group – to overcome information asymmetry.
What does an ICO look like?
Main resultsI ICO fundraising is more likely to succeed (reaching a minimumfundraising target) ifI independent analysts issue favorable ratings,I insiders retain more tokens (consistent with Leland and Pyle (1977)),I it does not feature high bonuses or a “Know Your Customer” policy,I or it features multi-language whitepapers/websites or acceptingmultiple currencies.
Main resultsI ICO fundraising is more likely to succeed (reaching a minimumfundraising target) ifI independent analysts issue favorable ratings,I insiders retain more tokens (consistent with Leland and Pyle (1977)),I it does not feature high bonuses or a “Know Your Customer” policy,I or it features multi-language whitepapers/websites or acceptingmultiple currencies.I Successful token sales attract more than 2,000 backers, compared to39 supporters in failed ICOs.I Investor subscriptions in initial periods strongly predict subsequenttoken sales and eventual fundraising success, exhibiting aninformation cascade (Cong and Xiao, 2018; Welch, 1992).I Average/median first-day underpricing is 160%/24%, and newlyissued tokens do not underperform in the long run.
Data sourcesI Our sample includes 1,549 ICOs announced between January 1,2016 and March 31, 2018, collected by ICObench.com.I Main variables include:I Start and end dates, soft and hard caps, gross proceeds,bonus/discount terms, token price, the number and percent oftokens for sale, etc.I Average analyst rating and the number of analysts covering an ICO.
Data sourcesI Our sample includes 1,549 ICOs announced between January 1,2016 and March 31, 2018, collected by ICObench.com.I Main variables include:I Start and end dates, soft and hard caps, gross proceeds,bonus/discount terms, token price, the number and percent oftokens for sale, etc.I Average analyst rating and the number of analysts covering an ICO.I Unique primary market subscription data from Etherscan.io:I Nearly 80% of our sample ICOs are based on the Ethereum platform.I We identify 952 ICOs with primary market transaction data.I Obtain subscriber ID, transation time, quantity of tokens bought,and dollar amount.I Secondary market prices and volumes are from CoinMarketCap.com.
ICO starts and fundraising success1600Number of opened ICOs (left axis)Percent of successful ICOs (right 2016Q2-2016Q1-20160100
Determinants of fundraising successProbit modelLinear prob. modelCoefficientt-stat.Marg. Prob.Coefficientt-stat.(1a)(1b)(1c)(2a)(2b)Analyst rating0.564***5.1722.2%0.164***4.75No. of analysts0.035***5.161.4%0.012***8.22Fraction of tokens for sale-0.735***-4.26-29.0%-0.160***-3.24ICO 5High bonus-0.279***-3.42-10.9%-0.083***-3.12Know Your Customer-0.147***-3.29-5.7%-0.057**-2.27Multiple languages0.253*1.8810.0%0.095**2.35Multiple currency0.0220.460.9%0.0151.20Quarterly dummiesYesCountry fixed effectsNoYesObservations1,4611,461Pseudo R-squared0.26Adj. R-squared% (Dep variable 1)Yes0.3245.2%45.2%
Gross proceedsDependent variableGross proceeds ( millions)Gross proceeds/Hard )(2b)Analyst rating4.680**1.980.055***3.23No. of analysts0.0680.410.006***3.25-1.79ICO characteristicsFraction of tokens for 3-0.50High bonus-4.747**-2.13-0.108**-2.18Know Your Customer-3.260-1.14-0.260***-5.85Multiple languages5.4501.04-0.014-0.92Multiple currencies0.8300.46-0.012-0.62Quarterly dummiesYesYesCountry fixed effectsYesYesObservations727543Adj. R-squared0.030.14
Daily token sales (successful vs. failed fundraising)
Hourly token sales on the 1st day of ICO
Sales during the 1st hour of ICO
Informed early investorsHolding-period returns for individual investorsHolding horizonTime of subscriptionsince ICO startICO FEsObservationsAdj. R-squared1 day -0.8261 month3 months6 months -0.449 es487,977438,229381,992226.5540.9360.7070.5810.703
Token returns and 5)432158.2%0.0024.4%0.00One-week return43316.7%0.00-14.1%0.00One-month return43063.3%0.00-24.5%0.00Three-month return364111.1%0.00-14.9%0.02Market-adjusted first-day return432143.1%0.0024.1%0.00Market-adjusted one-week return43314.6%0.03-12.9%0.00Market-adjusted one-month return43045.7%0.03-28.9%0.00Market-adjusted three-month return36446.1%0.03-37.0%0.00Gross proceeds ( million)41021.440.0011.140.00Money left on the table ( million)41042.200.001.260.00First-day turnover4056.7%0.001.3%0.00Days from ICO completion to listing43218.460.0014.000.00from t-testFirst-day returnWilcoxonp-value
ConclusionI ICO fundraising is more likely to succeed (reaching a minimumfundraising target) ifI independent analysts issue favorable ratings,I insiders retain more tokens (consistent with Leland and Pyle (1977)),I it does not feature high bonuses or a “Know Your Customer” policy,I or it features multi-language whitepapers/websites or acceptingmultiple currencies.I Investor subscriptions in initial periods strongly predict subsequenttoken sales and eventual fundraising success, exhibiting aninformation cascade (Cong and Xiao, 2018; Welch, 1992).I Average/median first-day underpricing is 160%/24%, and newlyissued tokens do not underperform in the long run.
Thank you!
I ICO fundraising is more likely to succeed (reaching a minimum fundraising target) if I independent analysts issue favorable ratings, . Quarterly dummies Yes Yes Country xed e ects No Yes Observations 1,461 1,461 Pseudo R-squared 0
