56% of ICOs fail within four months of token launch

digital tulips

56% of ICOs fail within four months of token launch

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According to a new Boston College study, 56% of ICOs fail within four months after their token launch.

Researchers Hugo Benedetti and Leonard Kostovetsky investigated 2,390 ICOs that launched prior to May 2018.

With results like that, it’s hardly surprising that regulators are taking a hard look at cryptocurrency capital raising and looking to protect investors.

Buy pre-sale and sell opening-day

ICO tradingIn an interview with Bloomberg, Kostovetsky suggested an investor’s best strategy may be to sell on the first day and certainly before six months.

“What we find is that once you go beyond three months, at most six months, they don’t outperform other cryptocurrencies,” Kostovetsky said. “The strongest return is actually in the first month.”

The research showed an average return of 179% from the sale of token to the first day of listing on an exchange, an average holding period of just 16 days. Even when tokens don’t begin trading on exchange within 60 days, the average ICO investors still earns 82%.

After actual trading begins, ICO investors earn an average 48% return within the first 30 days.

How are ICOs different from IPOs?

ICO researchUnderpricing is much larger for ICOs and traditional IPOs according to the report, because ICO entrepreneurs are less experienced in determining market value and do not often use the help of underwriters and market makers.

Post-ICO, cryptocurrencies tend to generate positive returns researchers say:

“In contrast to IPOs, crypto-tokens continue to generate abnormal positive average returns after the ICO. The first day’s average abnormal returns range from 14% to 16%, 30-day average abnormal returns range from 41% to 67%, and 180-day average abnormal returns range from 150% to 430%.”

Twitter impacts coin prices

Twitter has an impact on bitcoin prices according to the researchers. Frequent company postings are good news for prices while a lack of activity impacts negatively:

“We also show that in cryptocurrency markets, company announcements (as measured by Tweets) are good news, while no news is bad news. Daily market returns of tokens go up by about 0.3% for each Tweet that day and are also somewhat positively correlated with previous day’s Twitter intensity. On the other hand, returns are negatively correlated with Twitter intensity from the prior month, suggesting some overreaction to news announced on Twitter, leading to reversals.”

Risk-reward ratio is appropriate

ICO red flagsThe researchers say the relatively high returns reflect the high risk of investing in untried, often inexperienced companies in an unregulated marketplace:

“We show that ICO investors are receiving extraordinary compensation for providing capital to an unproven firm and product through unregulated means. On the one hand, this is consistent with the tight relationship between risk and return that we would expect in markets with rational agents. On the other hand, it flies in the face of many regulators and governments who view token sales as scams that take advantage of unsophisticated investors, and thus must be restricted to sophisticated investors or even banned.”

Report available

The Boston University paper adds to the growing list of ICO investment research, insight and warnings to investors and regulators. Regulations are on the horizon in many markets as regulators seek the balance between consumer and investor safety and digital security innovation.

The full report “Digital Tulips? Returns to Investors in Initial Coin Offerings” is available at no charge here.