Factors Influencing the Success of an Initial Coin Offering
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FACTORS INFLUENCING THE SUCCESS OF AN INITIAL COIN OFFERING -THE IMPACT OF LOCAT ION ON THE PROBABILITY OF REACHING AN ICO`S FUNDING GOAL- Diaconu, Stefan (11842008) Business Administration Finance Specialization Supervisor: Feher, Adam Date: 30th June 2020 Abstract The thesis analyzes whether the geographical location of a project influences the probability that an ICO is going to achieve its funding target. Data on 100 ICO campaigns was selected from 20 different locations between 2017 and 2018. The hypothesis tested whether ICOs based in the US are more likely to reach their funding target compared to ICOs in different countries. A binary logistic regression model was implemented to test the hypothesis. The results confirmed that US-based companies increase the likelihood of reaching the funding goal by 50%, while other location did not have a significant effect. Moreover, the model predicts a higher probability of success with higher experts rating and increased funding targets. Having a Twitter account, an increased team size or shorter campaign duration did not affect the likelihood of reaching the target. The study concludes with emphasizing the importance of developing a general regulatory framework and risk-assessment measures for ICOs. Statement of Originality This document is written by student Diaconu Stefan who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents. Content: 1. Introduction 2. Literature Review 3. Methodology 4. Results & Discussion 5. Conclusion 6. Appendix & References 1.Introduction An Initial Coin Offering is the process through which a digital asset becomes listed on a cryptocurrency exchange and subsequently can be publicly traded. Similar to IPOs, ICOs are primarily used as crowdfunding instruments for raising capital. As cryptocurrencies have many distinctive features compared to other asset classes, ICOs seem more appropriate for raising capital than the traditional forms of financing. The first Initial Coin Offering campaign was conducted in 2013 by Omnicoin, and achieved 5,000 Bitcoing in funding-the equivalent of $500,000 at the time (Hofer, 2018). Ever since, the phenomenon of ICOs been encompassing tremendous growth. Between January 2016 and August 2019, $31 billion have been raised by means of an ICO campaign. Over $15 billion have been obtained solely in the first two quarters of 2018, while the first quarter of 2019 achieved a remarkable $8.4 million in averaged raised funds (Yu, 2019). Moreover, 20 coins managed to obtain more than $100 million in funds (Howell et al., 2018). The most successful ICO is represented by EOS, who was able to raise over $4.23 billion within six months. EOS is a software that provides the infrastructure necessary for building decentralized applications on its network, similar to Ethereum. Likewise, Telegram Open Network coin (the token listing of the social platform Telegram) was able to reach the $1.7 billion mark in less than three months (Tokendata.io, 2020). Despite many successful ICOs, several tokens have failed in completing their process and never became listed on an exchange. The most resounding example is represented by the Decentralized Autonomous Organization (DAO), who was aiming to create a decentralized business model for both commercial and non- profit organizations. As the project steered a lot of excitement in the community, DAO managed to acquire $150 million only in the first month of the ICO. However, a cyber-attack exploited a vulnerability in the company's smart-contracts, which led to a loss of more than $50 million. The investors started liquidating all of their holdings once they became aware of the attack, sending the price of DAO coin into a free fall (U.today, 2020). Other failures are attributed to either poor development of token`s price (Gems coin) or simply for being a scam (Droplex and SwissCoin). Following a significant increase in popularity and funding capital, ICOs could become powerful tools for financing and developing new projects. Yet, the former can also be used as instruments for facilitating fraud and other illegal activities. Absent any form of laws who protect investors from losing their capital, the success of an ICO could be significantly diminished. (Lipusch, 2018). Also, vulnerabilities in the software of a digital platform could lead to cyber-attacks, and consequently cause millions of dollars in losses for investors. Therefore, an unsuccessful ICO campaign entails serious consequences for every party involved. Given the novelty of the phenomenon, it is important to discover the factors that maximize the success of a token-sale campaign. As such, the goal of this thesis is to study the underlying factors who contribute to the success of an Initial Coin Offering. More specifically, the relationship between a company`s location and the ICO`s probability of success will be analyzed. The thesis defines success as reaching 100% of the targeted amount of funds during the campaign. Consequently, the research question investigates whether the geographical location of a project influences the probability that an ICO will achieve its capital target. One hundred tokens were selected from 20 different locations, encompassing the main continents in which ICO campaigns took place -the United States, Europe, and Asia. The focus of this thesis is empirical by nature. The paper attempts to provide empirical support for the impact of location on the outcome of an ICO. In other words, the thesis analyzes whether certain countries are more successful in raising funds via ICOs than other countries. Governments around the world have taken various approaches regarding Initial Coin Offerings. On the one hand, there are countries who implemented laws that accommodate ICOs, such as USA and Switzerland. On the other hand, there are countries who strictly forbid ICOs to take place on their territories (China and Korea). The remaining countries position themselves in the middle- governments simply warn investors about the riskiness of ICOs, without implementing any measures to prevent it. The type of a government`s approach regarding ICOs is expected to be reflected in the results. Furthermore, the thesis contributes to current academic literature by studying the relationship between an ICO`s funding target and the probability of achieving that target. No study to date made the distinction between the company`s location and the project`s propensity to reach its goal. The results attempt to provide an empirical basis for researchers to continue studying the impact of the location on the outcome of an ICO, as well as convince policy-makers on the importance of developing a legal framework. The following sections will provide more details regarding this approach. Section 2 is separated into three subsections. The first subsection introduces the concept of blockchain technology and its applications. The second subsection explains the inner-workings of an ICO campaign and the advantages thereof. The last subsection provides an overview of the different legal frameworks around the world. The section is concluded with a review of the results obtained by several academic papers. Section 3 describes the sampling method, the variables included in the analysis, as well as the regression model. Section 4 analyzes the results of the logistic regression. The section also reflects on the limitations of the study, while also answering the research question. Section 5 concludes the paper by offering a summary of the results and their implications. 2. Literature Review 2.1 Blockchain Technology Prior to studying the factors influencing an ICO`s success, it is important to understand the underlying technology behind the digital assets. Token who aim to become listed on exchanges are products of blockchain technology. According to Boreiko, Ferrarini, and Giudici (2019), blockchain is a database that combines the data records into a block. Subsequently, a ledger is formed by sequentially chaining all of the blocks via a cryptographic signature. Afterward, the records of the ledgers are distributed on the network and synchronized in the computers of the users. Furthermore, Wright and De Fillippi (2015) offer an extensive analysis of the distributed ledger technology and the benefits of decentralization. The authors explain that blockchain facilitates the creation of self-executing contracts (also known as smart contracts), intelligent assets that can be owned all over the internet (smart property) as well as decentralized currencies. The property of decentralization and synchronization represent the core functions of blockchain technology, which highlights the latter`s potential benefit- bypassing the middlemen and simply relying on two parties for creating a contract. Once recorded on the blockchain, the contracts cannot be modified, nor removed by any party. This allows for greater transparency and control compared to the current status quo. Furthermore, contract negotiation is performed via the means of a probabilistic consensus mechanism, which enables the transition from one contract to the other on the network (Boreiko, Ferrarini & Giudici, 2019). The consensus mechanism is based upon certain protocols and complex algorithms situated at the core of each block in the blockchain system (Cong and He, 2019). The first direct application for blockchain is represented by Bitcoin. The platform uses the consensus mechanism to process and validate transactions. Upon solving complex computational problems, bitcoin miners are rewarded a certain number of tokens- as if the coins were extracted out of a mine (Cong and He, 2019). This system relies on the assumption that every participant has the option to enter the mining process and be rewarded. Consequently, there can be no cartels who take away the entire computational power and fully capture the rewards, unlike the case of oil production.