- Researchers from Boston University finds that only 44.2% of crypto projects last more than 120 days.
- The survival rate improves significantly for initial coin offerings that are listed on an exchange.
- For ICOs that list, token values typically provide above average returns (relative to the asset class) over the first six months.
Last year’s cryptocurrency boom saw a rush of new players enter the market with initial coin offerings.
But an academic study from Boston College found that amid the market hype, many new ICOs fail to get off the ground.
The researchers — Hugo Benedetti and Leonard Kostovetsky — said less than half of new ICOs survive for more than 120 days after launch.
The pair based their findings on analysis of a sample of over 1,000 cryptocurrency Twitter accounts. They found a statistically significant relationship between the number of Twitter users and the market capitalisation of a given coin.
“For each 1% increase in users, the market capitalisation increases by 1.2%, which is consistent with the increasing returns to user adoption in peer-to-peer platforms where these tokens are to be used for economic activity,” they said.
“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%, assuming that all firms inactive on Twitter in the fifth month did not survive.”
The 44.2% survival rate was calculated as a composite figure across three types of ICOs:
1. Those that don’t report raising any money and that don’t list on an exchange;
2. Those that report raising capital but don’t list; and
3. Those that list on an exchange.
The pair found that for category 1, the survival rate into a fifth month was only 17%. That rose to 48% for category two, while more than four in five ICOs (83%) that managed to list on an exchange were still in operation after four months.
“Since most of the capital to crypto-companies goes to firms in the last category, our analysis indicates that the fraction of funds invested in firms that become inactive after the ICO (potential scams) is only 11%,” the researchers said.
In that sense, the research suggests that the robustness of a new ICO is determined by whether the crypto-company is able to list on an exchange.
And when it does list, the pair found that investors who tipped money in at the ICO stage reap the best returns by cashing in quick.
“We created a dataset on 4,003 executed and planned ICOs, which raised a total of $12 billion in capital, nearly all since January 2017,” the pair said.
The researchers found crypto startups generated “an average return for ICO investors of 179%, accrued over an average holding period of 16 days from the ICO end date to the listing date”.
In assessing why so many ICOs skyrocket after listing, the researchers cited inherent under-pricing where tokens are sold to ICO investors at a “significant discount” to the opening market price.
Determining the correct listing price remains a difficult process for initial public offerings (IPOs) — the more traditional way of raising funds on equity markets.
The researchers said ICOs differ from IPOs in that crypto startups are usually much younger and smaller, and ICO firms don’t have have an underwriter — an external party (such as an investment bank) which helps to attract buyers and determine value.
Despite that, the researchers found that “returns to ICO investors have declined over time, suggesting that firms are learning from prior offerings about market demand for different kinds of platforms”.