ICOs Netting Investors Huge Profit, According to Boston College Study
Initial coin offerings (ICOs) may be getting a bad rap these days, but investors who participate in them are generating huge gains, according to new research funded by Boston College.
In a 54-page report titled “Digital Tulips: Returns to Investors in Initial Coin Offerings,” researchers Hugo Benedetti and Leonard Kostovetsky examined 4,003 planned and executed ICOs to determine average returns across multiple time frames. These projects, which collectively raised $12 billion in funding, encompass virtually every ICO since January 2017.
The study concluded that the average ICO price surged 179% between the token sale and the first day it listed on a cryptocurrency exchange, an average period of just 16 days. Tokens that failed to achieve exchange listings after 60 days still managed a net return to investors of 82% profit, measured in U.S. dollars.
After trading begins, tokens continue to surge in value, with average buy-and-hold returns of 48% in the first 30 trading days.
The researchers said the findings point to “significant ICO underpricing,” which is likely a reflection of the oversized risks investors assume for buying unproven assets.
“Our paper shows that ICOs investors are compensated handsomely for investing in new unproven platforms through unregulated offerings,” Benedetti and Kostovetsky wrote. “It suggests that scams, while plentiful in number, are not as important in terms of stolen capital because investors are shrewd enough to spot (and underfund) them.”
Spooked by regulatory uncertainty and the growing number of scams, investors have poured less money into ICOs in recent months. This trend was identified by the Boston College researchers, who concluded that regulators need to be careful not to associate the new funding class with fraudulent activity.
“Regulatory uncertainty in the United States and around the world has recently slowed the explosive growth in ICOs, but our findings suggest that while regulators should continue to deter fraudulent activities, they need to be careful not to throw out the baby with the bathwater,” they said.
ICOs have raised more than $5 billion this year, though funding has fallen significantly since January, when token startups brought in nearly $1.5 billion. The market appears to have bottomed in April, when only $561 million was raised. May is shaping up to be a stronger month with token sales exceeding $715 million.
The U.S. Securities and Exchange Commission (SEC) is planning to classify all ICOs as securities, which may limit their adoption domestically. Many ICOs have steered clear of the U.S. market over fears of being labelled securities.
Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. He holds investment positions in the coins, but does not engage in short-term or day-trading.
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