Cryptocurrencies: Stylized facts on a new investible instrument

Hu, Albert S.; Parlour, Christine A.; Rajan, Uday

doi:10.1111/fima.12300

Cited by 123 publications

(31 citation statements)

References 24 publications

(22 reference statements)

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“…Before proceeding to the analysis we would also like to point out that there is a rapidly expanding empirical literature on ICOs. Hu et al (2018), Dittmar and Wu (2018), Benedetti and Kostovetsky (2018) and Bianchi and Dickerson (2018) study factors that affect the returns of investments in token markets. and De Jong et al (2018) study the determinants of successful attempts to raise funds with an ICO.…”

Section: Related Literaturementioning

confidence: 99%

Entrepreneurial incentives and the role of initial coin offerings

Garratt

Oordt

2022

Journal of Economic Dynamics and Control

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Initial coin offerings (ICOs) are a new mode of financing start-ups that saw an explosion in popularity in 2017 but declined in popularity in the second half of 2018 as regulatory pressure, instances of fraud and reports of poor performance began to undermine their reputation. We examine whether ICOs are a passing fad or a worthwhile form of financing with beneficial economic properties.This paper focuses on ICOs where a start-up raises funds by issuing tokens and selling some or all of these tokens to external investors. The start-up commits to accepting tokens as the only means of payment to buy its products or to purchase goods and services on its platform, and commits to not issuing any additional tokens beyond the pre-committed amount.We employ a theoretical framework that was previously used to examine whether companies could be financed with debt or venture capital. This framework allows us to assess how financing a start-up through an ICO affects the incentives of an entrepreneur to lead the start-up to success. The framework also allows us to compare outcomes across ICO financing and conventional financing methods.Our results show that ICOs can have beneficial economic properties when compared with conventional financing strategies. All forms of financing we consider, including ICOs, can be inefficient. However, for certain projects, ICO financing generates a higher net present value than conventional modes of financing and is sometimes the only profitable form of financing. Crucial to this is the fact that the return to token investors under an ICO is based on the sales revenue of a project rather than profits.Our analysis also reveals two potential drawbacks of ICOs. First, there is an upper limit on the fraction of future sales that can be shared with outside investors. Such a constraint is less likely to be binding for platform-like projects, where total sales revenue on the platform can be high, while the platform-owner takes only a small cut of the total sales by facilitating the activity on the platform. Second, there is the risk of token investors trying to increase their payoffs by cornering the market for tokens. Token ownership needs to be sufficiently widely dispersed to avoid such market manipulation.Finally, our results show how the tokens issued in an ICO can become valuable without the start-up explicitly specifying how much value each token represents, as is the case in crowdfunding-like ICO schemes where a token represents a unit of output. In equilibrium, the tokens derive value from the mere fact that the start-up may create future transactional demand for the tokens. When ICOs first broke onto the scene, this contributed to the perception that ICOs allowed companies to obtain "money for nothing," because it allowed start-ups to raise funds without giving away ownership in the company. Our results debunk this notion by showing that the commitment to accept the tokens as the sole means of payment is in fact costly to both the start-up and its customers. As a result, ICO funding generat...

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Section: Related Literaturementioning

confidence: 99%

Entrepreneurial incentives and the role of initial coin offerings

Garratt

Oordt

2022

Journal of Economic Dynamics and Control

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“…Similarly, Ankenbrand and Bieri [35] concluded that cryptocurrencies can be seen as an individual asset class. Additional studies [11,36,37] offer valuable insides and facts about cryptocurrencies as a new financial asset, which makes them an effective diversification tool.…”

Section: Cryptocurrencies-a Short Overviewmentioning

confidence: 99%

Cryptocurrency Portfolio Selection—A Multicriteria Approach

2021

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This paper proposes the PROMETHEE II based multicriteria approach for cryptocurrency portfolio selection. Such an approach allows considering a number of variables important for cryptocurrencies rather than limiting them to the commonly employed return and risk. The proposed multiobjective decision making model gives the best cryptocurrency portfolio considering the daily return, standard deviation, value-at-risk, conditional value-at-risk, volume, market capitalization and attractiveness of nine cryptocurrencies from January 2017 to February 2020. The optimal portfolios are calculated at the first of each month by taking the previous 6 months of daily data for the calculations yielding with 32 optimal portfolios in 32 successive months. The out-of-sample performances of the proposed model are compared with five commonly used optimal portfolio models, i.e., naïve portfolio, two mean-variance models (in the middle and at the end of the efficient frontier), maximum Sharpe ratio and the middle of the mean-CVaR (conditional value-at-risk) efficient frontier, based on the average return, standard deviation and VaR (value-at-risk) of the returns in the next 30 days and the return in the next trading day for all portfolios on 32 dates. The proposed model wins against all other models according to all observed indicators, with the winnings spanning from 50% up to 94%, proving the benefits of employing more criteria and the appropriate multicriteria approach in the cryptocurrency portfolio selection process.

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“…Before proceeding to the analysis we would also like to point out that there is a rapidly expanding empirical literature on ICOs. Hu et al (2018), Dittmar andWu (2018), Benedetti andKostovetsky (2018) and Bianchi and Dickerson (2018) study factors that affect the returns of investments in token markets. and De Jong et al (2018) study the determinants of successful attempts to raise funds with an ICO.…”

Section: Related Literaturementioning

confidence: 99%