New research titled “Digital Tulips? Returns to Investors in Initial Coin Offerings,” has shown that those who have invested in an initial coin offering (ICO) made, on average, returns of at least 82%. The study also showed that buy-and-hold investments yielded an 'abnormal' return of 48% within the first 30 days of a token sale.
Since 2017, the number of ICOs and the level of funding made available to organizations starting a blockchain-based company has increased exponentially. By the researchers’ own account, this figure has, well and truly, exploded since 2015.
"In 2015, there were 9 such offerings, 74 in 2016, and more than 1,000 in 2017."
In terms of amounts crowdfunded to launch these tokens, the figures have surged to an estimated $6.6 billion in 2017. This year has demolished last year’s figure, as $7.15 billion were allocated to ICOs.
The study intended to uncover the level of returns investors can typically expect from these crowdfunding campaigns, while also attempting to find out why there's such a prevalence of undervaluation in the market, especially when compared to their older counterparts, Initial Public Offerings (IPOs).
This undervaluation is, in part, due to inexperience on the entrepreneur's side in determining the market’s demand and attaching a price relative to this demand. Moreover, various projects launched their token sale while their business concept was still in its infancy, which was a significant undervaluation factor.
The research was conducted through the use of a dataset consisting of over 4,003 executed ICOs. Measuring the rate of their success over time through Twitter traffic, valuation and rate of investment in their tokens.
Using Twitter, the researchers were able to track not just the lifespan of a token before and after its funding, but also the prevalence of updates posted on a project’s feed.
"We use intensity of tweets from the cryptocurrency official Twitter account after the ICO to estimate that the survival rate for startups after 120 days (from the end of the ICO) is only 44.2%... 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."
The study was successful in demonstrating the rate of returns on an ICO throughout its lifecycle. with first day's average abnormal returns ranging between 14-16%, increasing to 41-67% within the first 30-days. Including a 180-day average ‘abnormal’ return range of between 150-430%, depending on the coin offering.
Investors that decide upon an ICO that demonstrates greater activity on Twitter, it seems, will have a higher chance of a bigger payout. On average, ‘abnormal’ returns can hit 82% for investors that choose wisely in the space. These returns can be partly expected when social media activity is considered, along with the increasing level of undervaluations these tokens face when compared to IPOs.