Initial coin offerings and the cryptocurrency hype - the moderating role of exogenous and endogenous signals

Abstract

Initial coin offerings (ICOs) have recently emerged as a new financing instrument for entrepreneurial ventures, spurring economic and academic interest. Nevertheless, the impact of exogenous and endogenous signals on the performance of ICOs as well as the effects of the cryptocurrency hype and subsequent downfall of Bitcoin between 2016 and 2019 remain underexplored. We applied ordinary least squares (OLS) regressions based on a dataset containing 1597 ICOs that covers almost 2.5 years. The results show that exogenous and endogenous signals have a significant effect on the funds raised in ICOs. We also find that the Bitcoin price heavily drives the performance of ICOs. However, this hype effect is moderated, as high-quality ICOs are not pegged to these price developments. Revealing the interplay between hypes and signals in the ICO’s asset class should broaden the discussion of this emerging digital phenomenon.

The New Tokenomics of Crowdfunding

“…By contrast, Thies et al. (2022) propose that higher fundraising success is caused by investor herding due to hype about crypto prices, with investors being more likely to participate in token offerings when the prices of bitcoin and ether are higher. Almeida and Gonçalves (2023) also emphasize that crypto prices and trading activity are driven by popularity, emotion and sentiment.…”

“…4 Several authors 3 The full Scopus query used is: TITLE-ABS-KEY(('initial coin offering' OR 'ICO' OR 'token offering' OR 'initial exchange offering' OR 'IEO' OR 'security token offering' OR 'STO') AND ('success' or 'fundraising' or 'funding' or 'crowdfunding' OR 'performance')) AND (LIMIT-TO(SUBJAREA, 'BUSI') OR LIMIT-TO (SUBJAREA, 'ECON')) AND (LIMIT-TO(DOCTYPE, 'ar') OR LIMIT-TO(DOCTYPE, 'cp')). 4 For instance, Thies et al (2022) suggest that the components of a token offering exhibit the typical characteristics of crowdfunding and IPOs. Ahlers et al (2015) examine funding success on equity crowdfunding platforms and develop a framework in which the key factors of a venture's funding success are: (i) observable characteristics of venture quality and (ii) reduced investor uncertainty.…”

“…For instance, Blaseg (2018) and Bourveau et al (2022) focus on the role of information disclosure, and Czaja and Röder (2022) examine the level of investor familiarity and attention. Venture quality signals in the context of signalling theory or other frameworks are examined by numerous authors, such as Aggarwal, Hanley and Zhao (2019), Chen (2019), Fisch (2019), Philippi, Schuhmacher and Bastian (2021), Yen, Wang and Chen (2021), Campino, Brochado and Rosa (2022) and Thies et al (2022). 5 Some papers also provide warnings on the misuse of venture quality signals: Momtaz (2021b) focuses on moral hazard in signalling; Boreiko and Vidusso (2019) examine the token offering ratings assigned by independent websites; and Ante and Fiedler (2020) examine 'cheap talk' signals.…”

“…Campino, Brochado and Rosa (2022) view token offering projects operating in an 'open systems model' in relationship to prospective investors. Thies et al (2022) distinguish between endogenous and exogenous signals and suggest that both can influence token offering success. In the same vein, Aggarwal, Hanley and Zhao (2019) and Yen, Wang and Chen (2021) examine external quality ratings, while Belitski and Boreiko (2022) interpret additional venture characteristics as quality signals.…”

Electronic Markets on platform culture

“…Based on these fundamentals, they present an analysis of 1597 ICOs that were initiated during a time span of 2.5 years. Their objective is to identify the role of signals to investors that may be either influenced by an issuer (endogenous signals, such as the choice of social media channels) or not (exogenous signals, such as expert ratings) (Thies et al, 2022). Among the conclusions are that social media are valuable for investors in reducing information asymmetries as are expert ratings for assessing an ICO's quality and for containing the herding effect that exists due to the (presumably temporary) hype of ICOs.…”