Initial coin offerings (ICOs): Why do they succeed?

Recent literature has addressed initial coin offering (ICO) projects, which are an innovative form of venture financing through cryptocurrencies using blockchain technology. Many features of ICOs remain unexplored, leaving much room for additional research, including the success factors of ICO projects. We investigate the success of ICO projects, with our main purpose being to identify factors that influence a project’s outcome. Following a literature review, from which several potential variables were collected, we used a database comprising 428 ICO projects in the banking/financial sector to regress several econometric models. We confirmed the impacts of several variables and obtained particularly valuable results concerning project and campaign variables. We confirmed the importance of a well-structured and informative whitepaper. The proximity to certain markets with high availability of financial and human capital is also an important determinant of the success of an ICO. We also confirm the strong dependency on cryptocurrency and the impact of cryptocurrency valuations on the success of a project. Furthermore, we confirm the importance of social media in ICO projects, as well as the importance of human capital characteristics. Our research contributes to the ICO literature by capturing most of the success factors previously identified and testing their impacts based on a large database. The current research contributes to the building of systems theory and signaling theory by adapting their frameworks to the ICO environment. Our results are also important for regulators, as ICOs are mainly unregulated and have vast future potential, and for investors, who can benefit from our analysis and use it in their due diligence.

Success factors of initial coin offerings

This study furthers recent research on Initial Coin Offerings (ICO) in understanding the set of characteristics that drive ICO performance and reduce information asymmetry. Using data on 166 ICOs and more than 300,000 contribution addresses that sent funds to ICOs in Bitcoins or in Ether between 2013 and 2017, we examined the effect of ICO characteristics on ICO performance. We found that three boundary conditions predict ICO fundraising amount, number of investors, hard cap achievement and token ranking. These are registering ICO and publishing project’s code on GitHub, obtaining VC or Business angel financing before the campaign or during presale, and finally, publishing the whitepaper before the campaign’s start. Other factors such as serial investors, presale of tokens, bonus sales and funders' ownership share explain ICO performance. We offer implications for ICO investors and policymakers.

Identification of Scams in Initial Coin Offerings With Machine Learning

Following the emergence of cryptocurrencies, the field of digital assets experienced a sudden explosion of interest among institutional investors. However, regarding ICOs, there were a lot of scams involving the disappearance of firms after they had collected significant amounts of funds. We study how well one can predict if an offering will turn out to be a scam, doing so based on the characteristics known ex-ante. We therefore examine which of these characteristics are the most important predictors of a scam, and how they influence the probability of a scam. We use detailed data with 160 features from about 300 ICOs that took place before March 2018 and succeeded in raising most of their required capital. Various machine learning algorithms are applied together with novel XAI tools in order to identify the most important predictors of an offering’s failure and understand the shape of relationships. It turns out that based on the features known ex-ante, one can predict a scam with an accuracy of about 65–70%, and that nonlinear machine learning models perform better than traditional logistic regression and its regularized extensions.

Security token offerings

This paper posits that distinguishing security token offerings (STOs) from initial coin offerings (ICOs) is important for the study of entrepreneurial finance. We first provide a working definition of a security token and present an overview of the STO market using a unique STO sample. The STO activity developed after the end of the ICO market bubble. The STO market is, however, still a nascent market. STOs are geographically dispersed but concentrated in jurisdictions with accommodating securities laws. Next, we explore STO success factors. We show that various issuer and offering characteristics traditionally used in the ICO literature also matter for STO success. We also find that success is associated with good governance practices, consistent with the corporate finance literature. We conclude by discussing the implications of native digital securities, the next generation of security tokens, for entrepreneurial finance.