Initial Coin Offerings Financing Growth with Cryptocurrency Token

Initial Coin Offerings: Financing Growth with Cryptocurrency Token Sales Sabrina Howell, NYU & NBER Marina Niessner, Yale & AQR David Yermack, NYU, ECGI & NBER

How to Make Millions with Initial Coin Offerings https: //www. youtube. com/watch? v=dkze. Jrd. KDJk

ICO outcomes (broadly viewed) Any project that expressed availability of ICO investment (through a website publishing, ANN thread, or social media posting with a contribution address), did not have/had no intention of fulfilling project development duties with the funds, and/or was deemed by the community (message boards, website or other online information) to be a scam. Source: Satis Group LLC, https: //medium. com/satis-group/ico-quality-development-trading-e 4 fef 28 df 04 f

ICOs in 2017 and 2018 2017 2018 Source: www. coinschedule. com

Largest ICOs by amount raised • • • Block. one (EOS) Telegram Open Network Dragon Coin Huobi HDac Filecoin Tezos Sirin Labs Bancor Bankera $4. 0 billion $1. 7 billion $320 million $300 million $258 million $257 million $232 million $158 million $152 million $151 million

Block. one’s $4 billion ICO May 2018

What is an ICO? Filecoin, launched by Protocol Labs

How does Filecoin work? • Filecoin plans to provide decentralized storage, using a global network of computers with available space • Customers will pay for storage • Storage nodes will bid to host files and earn tokens • Miners will earn tokens for validating files via a “proof of space” algorithm • The Filecoin “token” will be the only means of payment

Why doesn’t Filecoin use regular currency? See, e. g. , Catalini and Gans (2018) • Co-opts customers through “network effects” – Similar to frequent flyer loyalty programs – Incentives to recruit other users • Reveals consumer demand prior to undertaking costly investment • Allows customers to share in the value created by the application – Equity holders retain ownership of the underlying platform

Allocation of Filecoin tokens 10% sold in August-Sept 2017: c. $200 mm FIL market value on December 27, 2018: c. $580 mm

Royal Albert Hall Constructed 1867 -1871 “Known as Members of the Corporation (or Seatholders), these original founders acquired seats. . . These arrangements continue to this day – currently the Members own 1, 270 seats out of the Hall’s 5, 272. . . By acquiring permanent seats at the Hall the Seatholders have private property rights (personal estate, not real estate) which can be given or sold by one party to another. . . The charity exists subject to these permanent private property rights. ” - www. royalalberthall. com

Precursors of tokens: Sports arena PSLs

Precursors of tokens: Social media

Precursors of tokens: Online gaming

Two major regulatory issues with ICOs 1. Are ICOs covered by the securities laws? – Of which country? – Why is this important? “I believe every ICO I’ve seen is a security” • Disclosure – cost of filing • Disclosure – release of competitive information • Potential liability, including for third parties 2. What are the tax consequences?

The Crypto Valley Vitalik Buterin founded Ethereum in Zug; hundreds have followed

Sample coverage

Most tokens (74%) reside on the Ethereum blockchain • Ethereum provides a basic “ERC 20” token template that can be customized by an issuer • An ERC 20 token is really an Ethereum “smart contract” that can be activated by a future instruction or contingency • Once launched, an ERC 20 token’s rules cannot be changed, and its supply cannot be increased

Method of distribution • Had a pre-sale • Dynamic pricing • Auction pricing 45% 34% 5% • Accepted ETH • Accepted BTC • Accepted LTC 66% 41% 9% • Accepted USD • Accepted EUR 10% 3%

Bonding and disclosure • • Twitter page Website Telegram group White paper – Budget for use of proceeds • Source code posted on Github • Lock-up period for founder • VC-backed 97% 92% 83% 81% 57% 66% 36% 11%

Criteria for “success” • Liquidity (Amihud) • Trading volume • Liquidity is the point of differentiation for a token compared to VC • We are seeking to capture market depth and interest, rather than short-term returns

Bonding and disclosure

Founder background

Token purpose and blockchain

ICO processes

Payment accepted

Raw returns 1 week Mean 29% Median -5% 1 month 76% -18% 3 months 6 months 263% 370% 16% -1% 6 -month abnormal returns vs. BTC: 229% (mean), -58% (median)

Are these attractive returns? • Probably not. Enormous survivorship bias in the data, since we consider only ICOs that traded for 90 days after being launched. • Returns do not take account of true costs of acquisition – Mining fees – Prices negotiated in pre-sale • Median ICO badly underperforms both BTC and ETH as benchmarks.

Liquidity and volume after 20 weeks

Conclusions • Investors clearly respond to aspects of ICO design – Utility features – Reduction of asymmetric information – Background of founder • ICO market is growing quickly and developing more liquidity