For all the media and regulator attention on ICO scams it can be easy to forget that people are also making money in the industry.
According to a recent report by the Boston College Carroll School of Management, the average ICO investor makes returns of 82 percent. While these results “could be an indication of bubbles”, the report suggests that they are also “consistent with high compensation for risk for investing in unproven pre-revenue platforms through unregulated offerings.”
Indeed, the risks might be a little too well compensated. Even accounting for this risk, the market is generating “abnormal positive average returns” with those who kept their tokens for more than six months seeing the greatest return on investment, averaging between 150% and 430%.
These results indicate “significant ICO underpricing” of tokens, caused by “a lack of expertise in determining market demand for the token/platform,” the uncertainty about valuing any startup at this stage in the business cycle, and the “urgency in distributing tokens to allow the platform to function.”
Over 4000 ICOs Studied
The report, “Digital Tulips? Returns to Investors in Initial Coin Offerings”, analysed over 4,000 upcoming and completed ICOs which together raised $12 billion, largely since January 2017.
Among its findings are that the average token increased in price by 179% from offering to exchange listing. However, where tokens failed to be listed on an exchange with 60 days the tokens were much more likely to post negative returns.
One indicator of a project’s success was the frequency that it posted updates to Twitter post-ICO: “in cryptocurrency markets, company announcements (as measured by tweets) are good news, while no news is bad news.” On a given day “market returns of tokens go up by about 0.3% for each Tweet that day.”
However, prospective ICOs should beware of trying to tweet their way to the moon. As the report points out, “returns are negatively correlated with Twitter intensity from the prior month”, likely explained by reversals once the market has realised it has overreacted to the previous month’s positive tweets.