By Lawrence Hecht
Information about token launches is not regulated, but the professionalization of the ICO process – also know as token generation events (TGEs) has led to several practices that are predictive of success. Early Evidence on the Role of Disclosure in the Unregulated Crypto Market is a quantitative analysis of 776 token launches attempted through February 2018, of which 659 completed an ICO that met its softcap funding requirements. Strategic Coin talked to two of the co-authors — Atif Ellahie and Daniele Macciocchi of the University of Utah — to gain a deeper understanding of their approach to data collection and analysis. Ironically, future studies can be strengthened if data about ICO pricing and other variables are more consistently available, which would allow researchers to use a much larger sample size. Below is a summary of the key findings and a discussion of their ramifications.
- Positive “Ratings” = More Money: Higher scores on ICObench and ICOrating on average raise more capital. In addition, these tokens see a greater rise in price from the end of the ICO to the end of its first day trading on an exchange. The ratings are based on data disclosed by ICO teams along with qualitative assessments by “experts”.
- Disclosing Token Distribution Details = Less Money: ICOs that disclose the ownership levels of founders on average raise less money than other tokens. ICOs that disclose information about post-ICO vesting of tokens on average see a slightly smaller increase in price from the ICO to the end of the first day of trading on an exchange.
- GitHub Is Good: Only 15% of failed ICOs disclosed source code via GitHub, compared to 51% of completed token launches.
- GitHub Is Bad: Projects that reveal source code are significantly more likely to “crash” or drop at least 75% in the first one, three or twelve month period after the token is listed on an exchange. The authors explain that it is possible that “technical disclosures represent proprietary information that subsequently erodes the competitive advantage of these virtual organizations”. In other words, for young tokens there is a quantifiable risk of an open source fork.
- White Paper Quality Matters More Than Quantity: White papers that are more “readable” are less likely to see a price crash. In contrast, an increased number of pages is associated with a statistically significant rise in crash risk after the token is listed on an exchange.
At first glance, it appears ICO rating sites are fulfilling their mission of providing information that positively impacts investor decisions. This may be true, but there is another explanation. The largest, well-funded ICOs usually have the ability to operate very professionally and have the resources to get assistance with a token launch. The professionalization of ICO marketing means that having a white paper, a social media presence, and disclosing team members’ LinkedIn profiles have all become table stakes – they are expected.
A few sites like ICObench are seeing positive network effects because ICO founders only have the time to fill out detailed profiles on a few sites. This does not mean that the analysis on the sites is unbiased, just that they have data that investors want. In fact, Althena co-founder Markus Hartmann’s recent blog post provides evidence that these crowdsourcing review sites can easily be manipulated. He also alleges that the ratings can be bought, but Strategic Coin has no independent information about that.
Full Disclosure: Strategic Coin provides independent due diligence of tokens, which is sometimes cited on other sites.
Overall, ICOs that don’t disclose a lot of quality information often fail because they launched too soon or weren’t strong enough. Those that succeed in meeting their softcap requirements are usually disclosing information as part of a maturing process. That being said, there continues to be short-term incentives not to provide limited information about founders’ ownership and post-ICO vesting. However, it is also likely that because they disclose more founder information, these same tokens may be more stable in the long run.
This academic paper also looks at the impact of social media activity on ICO success, a topic that Strategic Coin will look at in the future. Although the study considers return on investment, it also looks at volatility and risk as criteria that potential investors care about. Another study – Digital Tulips? Returns to Investors in Initial Coin Offerings by Hugo Benedetti and Leonard Kostovetsky of Boston College’s Carroll School of Management – does a deeper analysis of ROI and looks at how prices change from an ICO’s final public sale to that of its opening price on an exchange.
Future studies will need to investigate in greater detail how price and valuation change over time. While most analysis assumes that an ICO’s final public sale price is used to calculate ROI, that is only because that data is more readily available. However, sophisticated investors would rather look at the average price per share of a public sale. In addition, with limited information about pre-ICO or private sales, it is difficult to assess how valuations change over time.With one live pre-ICO sale for every two ongoing public ICOs, these data points matter. Another difficulty facing future researchers is that post-ICO vesting information is not collected in any standard way. In other words, calculations assuming that the market capitalization divided by the number of tokens circulating may not be a reliable way to assess return on investment.
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