A recent paper by Boston College researchers on ICO returns found that the average ICO investor earned 82% returns, with significant evidence of ICO underpricing. Hugo Benedetti and Leonard Kostovetsky wrote the paper titled “Digital Tulips? Returns to Investors in Initial Coin Offerings” dated May 20, 2018. Benedetti is a former Fulbright Scholar and a current finance Ph.D. candidate at the university’s prestigious Carroll School of Management. Kostovetsky, who holds an economics Ph.D. from Princeton, is an Assistant Professor of Finance at the school.
The paper found that ICO investors earned an average return of 179%, with an average holding period of 16 days. The holding period refers to the time between the end of the ICO to the token being listed on an exchange. This 179% return already takes into account the large negative returns (-100%) from tokens that are not listed within 60 days. The 82% figure refers to “abnormal returns,” which are returns earned above that of the asset class; in this case, cryptocurrencies. The graph below shows ICO outperformance when compared to both Bitcoin and a weighted index of all tokens.
In contrast to IPOs, crypto-tokens continue to generate abnormal positive average returns after the ICO… ICO investors are receiving extraordinary compensation for providing capital to an unproven firm and product through unregulated means.
The paper also found some evidence of “significant underpricing.” However, when it comes to ICOs, the researchers noted that this is not surprising given the lack of expertise of most founders and the higher degree of uncertainty involved. Also, unlike IPOs, the age of the company does not correlate to underpricing. Nevertheless, the researchers discovered that returns to ICO investors have declined over time, which suggests that platforms are learning and underpricing is reduced. The increased popularity of presales also reduces underpricing.