The Wisdom of Crowds in FinTech: Evidence from Initial Coin Offerings

Abstract

Certification by analysts on a FinTech platform that harnesses the “wisdom of crowds” is associated with successful initial coin offerings (ICOs). We show that favorable ratings by a group of analysts with diverse backgrounds positively predict fundraising success and long-run token performance. Analysts’ ratings also help detect potential fraud ex ante. We document that analysts have career concerns and are incentivized by the platform to issue informative ratings. Overall, our results suggest that a market-based certification process that relies on a diverse group of individuals is at play in financing blockchain startups.

The Role of Disclosure and Information Intermediaries in an Unregulated Capital Market: Evidence from Initial Coin Offerings

“…Crypto-experts with the highest weights are featured at the top of the rating sections and given more visibility. Consequently, more prominent and reputable cryptoexperts are more likely to be hired as advisors by subsequent ICOs, which can be lucrative (Lee, Li, and Shin [2021]). 23 Hence, crypto-experts are incentivized to use their technical expertise and exercise diligence in developing their ratings.…”

“…Our study is also one of the first to document the emergence of ICO rating platforms. Although a concurrent working paper by Lee, Li, and Shin [2021] also examines the association between ratings and ICO success, our paper differs in that we examine the interplay between ratings and voluntary disclosure. Our cross-sectional results suggest that ICO analysts and rating platforms serve as third-party information certifiers that help reduce adverse selection (e.g., Leland [1979], Lizzeri [1999], Roychowdhury and Srinivasan [2019]).…”

“…ICO analysts are not directly compensated for their ratings. Their primary incentive is to enhance their reputation for identifying successful ICOs because reputable crypto‐experts are more likely to be hired as advisors by subsequent ICO ventures, which can be lucrative (Lee, Li, and Shin [2021]). ICObench, a leading rating platform, combines ICO analyst ratings with an algorithm‐based rating to create an overall rating for each ICO it covers, and disseminates these ratings through its Web site.…”

Initial Coin offerings: what rights do investors have?

“…This strand of literature has largely focused on four types of financial outcomes, including the amount raised from and speed of ICOs (e.g., Fisch, 2019;Blaseg, 2018;Lee, Li and Shin, 2019), ICO underpricing (e.g., Benedetti and Kostovetsky, 2018;Dittmar and Wu, 2018;Felix and von Eije, 2019;Momtaz, 2020), exchange listing result (e.g., Amsden and Schweizer, 2018;Boreiko and Vidusso, 2019;De Jong, Roosenboom and van der Kolk, 2018;Lyandres, Palazzo and Rabetti, 2018), and liquidity and trading volume after the listing (e.g., Howell, Niessner and Yermack, 2019;Bourveau, et al 2018;Florysiak and Schandlbauer, 2018). In what follows, we summarize the key insights from each stream of studies.…”

“…In addition, marketing on and attention from social media (Felix and von Eije, 2019) and external ratings on the quality of business (Fenu, et al, 2018;Lee, Li and Shin, 2019) are also correlated with the financial success of an ICO. It is worth noting that ICO firms, in order to attract more financing from investors, often send false signals to the market through whitepapers and various other platforms (Akerlof, 1978;Chod and Lyandres, 2018;Shifflett and Jones, 2018).…”