Initial coin offerings (ICOs) are a novel technique to raise external funding for projects that have yet to be created. Despite the fact that the ICO market is still in its infancy, its size is already significant. As of October 2018, ICO projects had raised more than $21 billion, with a market valuation 10 times that amount due to significant aftermarket demand in cryptocurrencies. Originally intended to be a financing vehicle for start-ups, the scope of ICOs has swiftly extended beyond its original intent. The ICO of Venezuela’s national cryptocurrency, the petro, is one example. Cryptocurrency price vary to buy bitcoin in Dubai and its performance is then evaluated.
The ICO market’s rapid growth has already attracted more than 600 institutional investors, as well as rising interest from entrepreneurial firms, the broader investment management community, regulators, and academic finance.
Initial Coin Offerings dependencies
ICOs are classified into portfolios depending on liquidity to see if there are systematic differences in the pricing of these ICOs. According to Howell et al. (2018), liquidity is a critical success element for blockchain-based platforms that raise funding through ICOs. Intuitively, the value of these platforms grows in proportion to the number of users, and hence liquidity should be positively connected to platform value and ICO success. Results from cross-sectional portfolios based on market capitalization and high-low ratios supplement this viewpoint.
Furthermore, in the spirit of Fama and French (1992), the sample is divided into cross-sectional portfolios to offer a more complete view of data skewness and how it influences ICO price and performance. The empirical regularity shown by this activity includes, among other things, a considerable size impact. Large enterprises are more likely to be overpriced, which explains why aggregate money left on the table in nominal terms is negative for some time periods despite the fact that average underpricing is always positive. In the long term, the size effect wins. Large ICOs underperform significantly.
Looking at the average value destruction and creation after one month of trading based on BHR, the typical firm in the value-destroying subsample has destroyed $14.2 million. This compared to the average value creation in the subset of ICO ventures, which is $23 million. When I utilize BHAR for the computation, however, the value destruction is more evident. This is due to the fact that BHR adjusted by a bitcoin market capitalization-weighted index includes the opportunity costs of not participating in the sample’s extreme outperformers.
Conflicts for ICO Market
Finally, there is conflicting data about whether the ICO market adds or destroys value in aggregate. In three months or less, ICOs have destroyed more aggregate value than they have produced. This is why sell bitcoin in Dubai is common now a days. After three trading months, the overall value destruction by ICOs is $1.18 billion (aggregate value destruction – aggregate value creation; $6.74 billion – $5.54 billion). ICOs that remain in my sample for more than three months, on the other hand, build value in aggregate. For example, the total value created by ICOs with a one-year holding period is $3.56 billion.
Conclusion
This article presents the first comprehensive evidence of ICO price and performance. The findings indicate that there is significant ICO underpricing, and that variables like as liquidity, market size, and high-low price ratios are connected to differences in initial returns on first trading days. However, 40% of all ICOs are overvalued.
Several important findings emerge from long-term performance analyses of ICOs. Buy-and-hold returns for the average ICO are significantly positive, but they are significantly negative for the median ICO. In reality, the typical ICO decreases value by around 30% for holding durations ranging from one to twenty-four months. In keeping with this, after the first month of trading, 65 percent of all ICOs trade at a discount.
There is, nevertheless, a significant size effect. Large corporations are frequently expensive and underperform in the long run. These findings have several key consequences with practical ramifications. The degree of disintermediation in financial markets is limited. Complete disintermediation might not be feasible.
On the one hand, this demands for policymakers and regulators to provide a regulatory framework for the ICO market, which has yet to be done. However, it shows that institutional investors may fill the void left by the absence of trusted middlemen. Institutional investors can contribute economic value by providing screening and monitoring services. The engagement of institutional AL investors may therefore signify the quality of the ICO project, attracting more investors. As a result, institutional investors should expect to benefit from their role as a certifying organization.
Many intriguing issues concerning this skyrocketing market remain unanswered. A full analysis of the determinants and consequences of the empirical return distribution in the ICO market presented herein might be a promising route for future research.
Carolyn Coley is a blockchain reporter. She joined Smartereum after graduating from UC Berkeley in 2018.
