By Lucas Laursen
July 10, 2018

Double your money in a couple weeks, or lose your shirt within a few months.

That’s the pattern for initial coin offerings (ICOs) detected by economists Leonard Kostovetsky and Hugo Benedetti at Boston College, who conducted a study of over 4,000 startups that raised $12 billion from January 2017 to April 2018.

An ICO is a way for startups to raise early funds, but unlike conventional investments, the so-called coins, or tokens, will later serve as a currency to be exchanged on a new platform. Few people, including the people offering them, really seem to understand all the differences between ICOs and conventional share offerings.

That’s where economics–and Twitter–come in. Kostovetsky and Benedetti used the Twitter accounts of startups with ICOs to generate a handful of metrics for comparison to traditional firms. For example, they use Twitter account signup dates as a proxy for company age. And they use activity and followers on the accounts as measures of the firm’s survival rates.

They report in a working paper that only 44.2% of the startups were still active 120 days after the end of their ICOs. But even though many ICO-powered startups live fast and die young, investors are making money, Kostovetsky and Benedetti report.

When they looked at token prices before and after ICOs, they found that over an average holding period of just 16 days, investors earned returns of 179%.

They also found another quirk: Returns on a conventional firm tend to taper off after its initial public offering (IPO) on a stock exchange. But crypto-tokens keep more of their early pop. Kostovetsky and Benedetti found that 30 days after listing, ICOs had returns 48% higher than a basket of more established cryptocurrencies such as Bitcoin; the crypto-tokens still held an advantage six months after listing.

If prices keep rising like that after trading, it suggests that founders should have set the initial prices higher. Kostovetsky and Benedetti speculate that entrepreneurs may not yet have figured out how to price pre-ICO sales. They also noticed in the data that the profit margins for ICOs, while still huge, have gotten smaller, so entrepreneurs may be getting better at pricing their offerings.

Of course, those returns are supposed to compensate the risks investors take, right? Some ICO sales probably are indeed scams, but Kostovetsky and Benedetti estimate, based on how soon after ICO startups went silent on Twitter, that only about 11% of ICOs are fraudulent.

While some countries have banned cryptocurrency trading altogether, those still on the fence might take inspiration from this study–and investors–and start quantifying and managing the real risks.

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