Initial Coin Offerings

What actually happens on the very first day a new kind of financial market comes to life — before regulators have a playbook, before Wall Street has a desk for it, and before anyone really knows what these tokens are worth? Paul Momtaz tracked hundreds of Initial Coin Offerings through exactly that moment, and what he found is a market that looks familiar in some ways and deeply strange in others. An Initial Coin Offering is, at its core, a token sale. An entrepreneur writes a smart contract, which is a self-executing piece of code on a blockchain, and issues tokens directly to investors — no bank, no broker, and no filing required. Most tokens are built on the Ethereum blockchain using what is called the ERC-20 technical standard. By January 2019, more than 165,000 tokens had been created that way, accounting for over 80 percent of the market. Momtaz identifies three types. Utility tokens give you the right to redeem a future product or service but no ownership stake. Security tokens carry voting rights and fall under securities law, which is determined in the United States by something called the Howey Test, though fewer than 3 percent of Initial Coin Offerings involved security tokens by the end of 2018. Cryptocurrency tokens are general-purpose stores of value, like Bitcoin. Compare this to conventional financing and the differences are striking. Reward crowdfunding raises thousands to low six figures. Equity crowdfunding gets you up to a couple of million. Venture capital runs from half a million to ten million. Initial Public Offerings go higher still. Initial Coin Offerings, at least in principle, can operate at any of those stages, with funding ranging from around one hundred thousand dollars up to 4.2 billion in the most extreme case Momtaz documents. But the truly novel feature is liquidity. Tokens can trade on secondary markets around the clock, often within months of the Initial Coin Offering closing. For early-stage finance, that is genuinely unprecedented. The central question Momtaz sets out to answer is whether that rapid liquidity actually delivers for investors or whether the promise exceeds the reality. The market itself grew at a pace that is hard to overstate. The first Initial Coin Offering occurred in July 2013 when the Mastercoin project raised more than five million dollars in Bitcoin. By January 2019, roughly five thousand firms had announced Initial Coin Offerings, and thousands of Ethereum-based tokens had been created. Growth was highly concentrated: in 2017 alone, just twenty Initial Coin Offerings accounted for thirty-seven percent of all proceeds. Momtaz assembled a dataset of two thousand one hundred thirty-one Initial Coin Offerings from August 2015 through April 2018, cross-checking across multiple platforms and manually verifying entries against white papers and LinkedIn profiles. For a subsample of five hundred one Initial Coin Offerings, he tracks a positive time trend in gross proceeds of roughly thirteen thousand dollars per day since January 2017. Getting to market takes time, but not as much as you might expect. From project inception to first trading availability, the mean is five hundred ninety-eight days, but the median is three hundred twelve, and the distribution is wildly spread out. Once an Initial Coin Offering closes, though, tokens reach major exchanges much faster: a median of just forty-two days and a mean of ninety-three. The market is fast once it gets moving. Now to the performance findings. The headline number is this: the average Initial Coin Offering delivers an 8.2 percent raw return on the first day of trading. That is statistically significant at the one percent level. It echoes the Initial Public Offering underpricing literature, where stocks routinely pop on their first trading day as a signal to uninformed investors. But the average flatters the distribution badly. The median raw return is just 2.6 percent. The standard deviation is 25.6 percent. And roughly 40 percent of Initial Coin Offerings destroy investor value on day one, somewhere between thirty-nine point five and forty-five point seven percent, depending on which return measure you use. Strong average, brutal variance, and two in five launches end their first day underwater. Momtaz uses three return measures to make sure the picture holds. The raw return is simply the move from opening to closing price on day one. Abnormal returns adjust for what the broader cryptocurrency market did simultaneously — either using an equally weighted benchmark, which treats every listed cryptocurrency the same, or a value weighted benchmark, which weights by market capitalization. The mean equally weighted abnormal return is 6.8 percent; the value weighted version is 7.6 percent. The medians are 3.4 and 3.3 percent. Crucially, Momtaz finds no time trend in first-day returns across the sample period. Unlike fundraising totals, which rose sharply, average listing day performance was roughly flat over time. What actually predicts whether an Initial Coin Offering performs well? Momtaz uses expert ratings from the platform ICObench, which scores projects on three dimensions: the quality of the management team, the ambition of the project's vision, and the strength of the Initial Coin Offering profile, which is essentially how well the offering itself is constructed. The results for management and Initial Coin Offering profile are intuitive. A one-standard-deviation improvement in management quality raises the probability of a positive first-day return by more than twenty-five percentage points, and a stronger Initial Coin Offering profile is associated with two point four four million more dollars in gross proceeds. But the vision result is the one that stops you. More visionary projects — ones rated higher on ambition and scope — actually trade at a discount. The vision coefficient in the first-day return regression is negative zero point zero five seven, statistically significant, and a one-standard-deviation increase in vision reduces the probability of a positive first-day return by nearly twenty-nine percentage points. Momtaz's interpretation is that investors aren't punishing ambition out of pessimism. They are pricing in realized failure risk. Highly visionary projects are harder to execute, and the market appears to know it. That interpretation is confirmed in the delisting data. Using price histories across twenty-six major exchanges, Momtaz finds that twenty-one percent of projects were delisted from at least one major platform, and twelve point nine percent were delisted from all tracked exchanges — a threshold he treats as project death because delisting announcements caused affected token prices to collapse to zero. And which projects die? The same ones that got penalized on day one. A one-standard-deviation increase in vision raises the probability of project death by twenty-one point five percent. A one-standard-deviation improvement in management quality lowers it by nineteen point eight percent. The market is not just noisy on the listing day; it is actively, and largely correctly, sorting survival prospects. Investors price in failure risk at the moment of listing, and that assessment proves accurate over time. The final piece of Momtaz's paper examines what happens when the market gets hit from outside. He studies three specific shocks: China's ban on Initial Coin Offerings in September 2017, the Parity Wallet hack — a security breach that froze hundreds of millions of dollars in Ethereum — and Facebook's ban on Initial Coin Offering advertising in early 2018. Taken together, adverse industry events are associated with a seven point sixty-two percentage point drop in first-day raw returns, large enough to wipe out nearly all the average gains that first-day investors would otherwise expect. The nominal first-day return in the aftermath of adverse events falls to about sixty-two cents. The Parity Wallet hack hits hardest. Its coefficient is negative sixteen point ninety-three percentage points, translating into actual first-day losses of about eight point seven percent. The Chinese ban reduced average first-day returns by roughly three-quarters. The South Korean ban shows a similar magnitude. Momtaz finds a meaningful asymmetry in the type of shock: events that cast doubt on the technological robustness of the underlying infrastructure produce more than twice as much market disruption as regulatory actions. In his words, more than twice as much market uncertainty stems from technical issues compared to regulatory actions. What the paper ultimately describes is a market that delivers something genuinely new — rapid liquidity for early-stage investments — but that comes with fragilities that more established markets have spent decades engineering around. Average first-day returns are real, but 40 percent of launches lose money immediately. Visionary projects are more likely to die, and a single hack or regulatory announcement can demolish the gains of an entire cohort of investors. Momtaz frames this for all three audiences: entrepreneurs and investors face a market that offers quick exits but exposes them to abrupt, large losses. Policymakers should weigh the asymmetric damage that technical vulnerabilities cause relative to regulatory moves when designing oversight. The Initial Coin Offering market, in the end, is a case study in what a financial market looks like before it grows its guardrails. This lecture was created by ennepō. Go to https://ennepo.ai to Discover, Create and Follow the latest research in your field. Read when you can. Listen when you want to.