Trust is All You Need: An Empirical Exploration of Initial Coin Offerings (ICOs) and ICO Reputation Scores

Lauren Rhue

Abstract


Initial Coin Offerings (ICOs) are increasingly discussed as a viable option for start-up companies to raise capital for new projects. In an ICO, a company issues a virtual coin, similar to bitcoin, to raise money. Investors purchase coins in expectation that these coins and their underlying value will rise in the future. Described as a hybrid of an initial public offering (IPO) and a crowdfunding campaign, an ICO poses unique opportunities and risks for both entrepreneurs and investors. Entrepreneurs can attract millions in public investment without the legal and financial restrictions associated with an IPO, and investors can directly finance start-ups and receive a substantial return on their investment.  Given the recent emergence of this technology, there is limited empirical research about the ICO landscape. Using data from multiple platforms, this paper provides an overview of the ICO landscape such as the number of ICOs that are KYC-compliant and that exclude residents of the U.S. and China. In addition, the empirical findings suggest that some variables associated with quality, such as the number of bugs in the smart contract, influence ICO success metrics. Furthermore, this paper analyzes the ICO reputation scores across multiple data sources. There is an inconsistent association of reputation with success metrics and a low correlation of ICO reputation across data sources, highlighting the challenges faced by investors in finding reliable information about ICOs. Given this new landscape, this paper provides a number of potential avenues for research into ICOs. In particular, this research underscores the need for reputation systems to facilitate trust, a bedrock of digital economic transactions.

Full Text:

PDF

References


Adhami, S., Giudici, G., and Martinazzi, S. 2018. “Why Do Businesses Go Crypto? An Empirical Analysis of Initial Coin Offerings,” Journal of Economics and Business, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3046209 or http://dx.doi.org/10.2139/ssrn.3046209

Baucus, M.A., and Mitteness, S.R. 2016. “Crowdfrauding: Avoiding Ponzi entrepreneurs when investing in new ventures,” Business Horizons. Volume 59, Issue 1, January–February 2016, pp. 37-50.

Belleflamme, P., Lambert, T., Schwienbacher, A. 2013 Individual crowdfunding practices. Venture Capital, 15 (4), pp. 313-333

Benton, M.C. and Radziwill, N.M. Quality and Innovation with Blockchain Technology. Available: https://arxiv.org/ftp/arxiv/papers/1710/1710.04130.pdf

Bianchetti, M. and Ricci, C. and Scaringi, M. 2018. Are Cryptocurrencies Real Financial Bubbles? Evidence from Quantitative Analyses (February 24, 2018). Available at SSRN: https://ssrn.com/abstract=3092427 or http://dx.doi.org/10.2139/ssrn.3092427

Burtch, G., Ghose, A., Wattal, S. 2013. An Empirical Examination of the Antecedents and Consequences of Contribution Patterns in SCrowd-Funded Markets. Information Systems Research 24(3) 499-519.

Chen, S.C., and Dhillon, G.S. 2005. Interpreting Dimensions of Consumer Trust in E-Commerce. Information Technology and Management 4, 303–318, 2003

Catalini, C. and Gans, J.S. 2018 Initial Coin Offerings and the Value of Crypto Tokens. NBER Working Paper No. 24418, available at: http://www.nber.org/papers/w24418

Chuen, K., Lee, D., Guo, L. and Wang, Y. 2017. Cryptocurrency: A New Investment Opportunity? (October 24, 2017). Available at SSRN: https://ssrn.com/abstract=2994097 or http://dx.doi.org/10.2139/ssrn.2994097

Colak, S. and Hoogeveen, M. 2017 TACXE: a Blockchain Based Token Listing and Exchange Platform. Available at: https://iceclog.com/wp-content/uploads/2017/11/TACXE-Position-Paper-v07nov2017.pdf

Coleman, R.W. 2007. Is the Future of the Microfinance Movement to be Found on the Internet? Proceedings of the 17th International Conference of the International Trade and Finance Association, Miami, Florida, May 16-20, 2007.

Conley, J. 2017. Economics of Crypto-tokens and Initial Coin Offerings. http://www.accessecon.com/Pubs/VUECON/VUECON-17-00008.pdf

Davidson, S., De Filippi, P., & Potts, J. 2018. Blockchains and the economic institutions of capitalism. Journal of Institutional Economics, 1-20. doi:10.1017/S1744137417000200

Dell'Erba, M. 2017. Initial Coin Offerings. A Primer (July 7, 2017). Available at SSRN: https://ssrn.com/abstract=3063536 or http://dx.doi.org/10.2139/ssrn.3063536

Duarte, J. Siegel, S., Young L. 2012. Trust and Credit: The Role of Appearance in Peer-to-peer Lending. The Review of Financial Studies. Oxford University Press, Society for Financial Studies. Volume 25 p=2455-2483.

Ert, E., Fleischer, A., & Magen, N. 2016. “Trust and reputation in the sharing economy: The role of personal photos in Airbnb,” Tourism Management (55), pp. 62-73.

EY Research. EY research: initial coin offerings (ICOs). Dec 2017. Available: http://www.ey.com/Publication/vwLUAssets/ey-research-initial-coin-offerings-icos/$File/ey-research-initial-coin-offerings-icos.pdf

Eyal, I. and Sirer, E.G. 2014. “Majority is not enough: Bitcoin mining is vulnerable.” International conference on financial cryptography and data security. Springer, Berlin, Heidelberg, 2014.

Fisch, C. 2018. Initial Coin Offerings (ICOs) to Finance New Ventures: An Exploratory Study (March 1, 2018). Available at SSRN: https://ssrn.com/abstract=3147521 or http://dx.doi.org/10.2139/ssrn.3147521

Gefen, D. 2002. Customer loyalty in e-commerce. Journal of the Association for Information Systems 3(1) 27-51.

Gefen, D., Karahanna, E., and Straub, D.W. 2003. Trust and TAM in Online Shopping: An Integrated Model. MIS Quarterly 27(1), pp. 51-90.

Hacker, P. and Thomale, C. 2017. Crypto-Securities Regulation: ICOs, Token Sales and Cryptocurrencies under EU Financial Law (November 22, 2017). Available at SSRN: https://ssrn.com/abstract=3075820 or http://dx.doi.org/10.2139/ssrn.3075820

Jaffe, J. 2018. Initial Coin Offerings, Explained. CNET Feb 2, 2018. https://www.cnet.com/how-to/initial-coin-offerings-explained/

Jin, S. 2017. Cryptoeconomics: Data Application for Token Sales Analysis. http://aisel.aisnet.org/cgi/viewcontent.cgi?article=1001&context=icis2017b

Li, J. and Mann, W. 2018. Initial Coin Offering and Platform Building (April 2, 2018). Available at SSRN: https://ssrn.com/abstract=3088726 or http://dx.doi.org/10.2139/ssrn.3088726

Lowry, P.B., Vance, A., Moody, G., Beckman, B., and Read, A. 2008. Explaining and Predicting the Impact of Branding Alliances and Web Site Quality on Initial Consumer Trust of E-Commerce Web Sites. Journal of Management Information Systems, Vol. 24, No. 4, pp. 199-224.

Mollick, E. 2014. The dynamics of crowdfunding: an exploratory study. Journal of Business Venturing 29(1): 1-16. doi:10.1016/j.jbusvent.2013.06.005

Murray, F., and Catalini, C. 2014. Can Crowdfunding Democratize Access to Capital? innovation@work Blog, Executive MIT. Available at: http://executive.mit.edu/blog/can-crowdfunding-democratize-access-to-capital#.WQyYePlVmM9

Lipusch, N. 2018. Initial Coin Offerings – A Paradigm Shift in Funding Disruptive Innovation. Working paper, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3148181.

Nakamoto, S. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System. White paper, available at: https://bitcoin.org/bitcoin.pdf

Partz, 2018. Kodak Postpones ICO To Verify ‘Accredited’ Status Of 40K Potential Investors. https://cointelegraph.com/news/kodak-postpones-ico-to-verify-accredited-status-of-40k-potential-investors

Popper, N. 2017a. A Explanation of Initial Coin Offerings. New York Times, Oct 27, 2017. Available at: https://www.nytimes.com/2017/10/27/technology/what-is-an-initial-coin-offering.html

Popper, N. 2017b. Easiest Path to Riches on the Web? An Initial Coin Offering. New York Times, June 23, 2017. Available at https://www.nytimes.com/2017/06/23/business/dealbook/coin-digital-currency.html

Resnick, P. and Zeckhauser, R. 2002. Trust among strangers in internet transactions: Empirical analysis of eBay' s reputation system, in Michael R. Baye (ed.) The Economics of the Internet and E-commerce (Advances in Applied Microeconomics, Volume 11) Emerald Group Publishing Limited, pp.127 - 157

Rhue, L. 2018. “An Overview of Crowd-based Markets and Racial Discrimination,” Proceedings of the Americas Conference on Information Systems, Aug 2018, New Orleans, LA. (forthcoming)

Rohr, and J., and Wright, A. 2018. “Blockchain-Based Token Sales, Initial Coin Offerings, and the Democratization of Public Capital Markets,” Working Paper, SSRN, available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3048104.

Sapuric, S., Kokkinaki, A.,and , Georgiou, I. 2017. In Which Distributed Ledger Do We Trust? A Comparative Analysis Of Cryptocurrencies. MCIS 2017 Proceedings. 21. http://aisel.aisnet.org/mcis2017/21

SEC. 2018a. https://www.sec.gov/fast-answers/answers-accredhtm.html

SEC, 2018b. Available at: https://www.sec.gov/ICO

SEC, 2018c. Investor Bulletin: Initial Coin Offers. July 25, 2017. Available at: https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-bulletin-initial-coin-offerings

Sundararajan, A. 2016. The Sharing Economy: The End of Employment and the Rise of Crowd-Based Capitalism. MIT Press, Cambridge, MA.

Torkzadeh, G. and Dhillon, G. 2002. Measuring Factors that Influence the Success of Internet Commerce. Information Systems Research 13(2), pp. 187-204.

Yermack, D. (2014a). Is Bitcoin a Real Currency? An Economic Appraisal. NBER Working Paper 19747. Available At: http://www.nber.org/papers/w19747.

Yermack, D. (2014b). Bitcoin Lacks the Properties of a Real Currency. MIT Technology Review March/April 2014.

Zetzsche, Dirk A. and Buckley, Ross P. and Arner, Douglas W. and Föhr, Linus, The ICO Gold Rush: It's a Scam, It's a Bubble, It's a Super Challenge for Regulators (February 15, 2018). University of Luxembourg Law Working Paper No. 11/2017; UNSW Law Research Paper No. 83; University of Hong Kong Faculty of Law Research Paper No. 2017/035; European Banking Institute Working Paper Series 18/2018. Available at SSRN: https://ssrn.com/abstract=3072298 or http://dx.doi.org/10.2139/ssrn.3072298


Refbacks

  • There are currently no refbacks.


Copyright (c) 2021 Lauren Rhue

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.