Why Do Some Initial Coin Offerings (ICOs) Succeed?

Initial coin offerings (ICOs) are a new way of raising funds using cryptocurrencies and blockchain technology. This study looks at what makes ICO projects successful by analyzing data from 428 ICOs in the banking and financial sector. Key findings include the importance of a detailed whitepaper, proximity to financial markets, cryptocurrency valuations, and active social media use. This research helps both regulators and investors understand the success factors in the largely unregulated ICO market.

ICOs, first introduced in 2013 with the MasterCoin project, allow global financing of innovative ideas through blockchain and cryptocurrencies.Key benefits include democratizing investments and promoting technological solutions, especially during crises like the COVID-19 pandemic. In ICOs, investors convert fiat currency into cryptocurrency to participate, receiving tokens in return. These tokens can be currency, security, or utility tokens.

The project's details are outlined in a whitepaper, which, despite being unregulated, serves as a measure of credibility. ICOs often have capital thresholds such as no-cap, soft-cap, hard-cap, and dynamic ceilings to define funding limits and distribution methods. ICOs are different from other financing methods due to their blockchain foundation, lack of third-party involvement, and lower investment thresholds.

This study aims to identify factors that lead to the success of ICO projects, focusing on technological, financial, and regulatory environments. It uses systems theory and signaling theory to examine variables related to the project, campaign, social networks, and human capital.

Systems theory, developed by Ludwig von Bertalanffy, views entities as part of larger interactive systems. It emphasizes the importance of understanding interactions holistically and the role of information in these interactions. Organizations like ICO projects operate as open systems, adapting based on feedback from their environment and interacting with various external agents.

Signaling theory deals with information asymmetries in markets, where project promoters have more information than investors.Effective signals like patents, technical whitepapers, and high-quality code help reduce these asymmetries. In ICOs, signals provided through whitepapers and social media are crucial for conveying project quality to investors.

Success factors inherent to the project include its industry, location, and the quality of its whitepaper.Technological ventures in developed financial markets are typically more successful. The whitepaper's content, length, and technical details reduce information asymmetry and enhance credibility. A secondary market for tokens also contributes to success.

Campaign characteristics, such as campaign length, pre-sale of tokens, and bonus schemes, impact project success.Shorter campaigns and pre-sales generally have positive outcomes, though excessive bonuses may raise suspicions. Accepting multiple cryptocurrencies and higher token prices is associated with successful projects. Cryptocurrency volatility, especially Ethereum, also affects project success.

Active and well-managed social network accounts, especially on Twitter and GitHub, positively influence project success.Regular updates and investor engagement through these platforms reduce information asymmetries and build trust.

The size and characteristics of the project team are crucial.Larger teams with diverse skills and extensive networks tend to be more successful. Disclosing team members' professional backgrounds and LinkedIn connections enhances credibility and attracts investment.

The study uses a database of 428 ICO projects in the banking/financial sector, capturing various projects, campaigns, social networks, and team variables.The primary measure of success is the total capital raised, with additional models considering soft-cap and hard-cap thresholds and the existence of a secondary market.

Econometric models, including ordinary least squares (OLS), robust regression, and logistic regression, are used to analyze the data.The robust regression method addresses data limitations and outliers common in ICO data.

The analysis confirms the importance of a well-structured whitepaper, cryptocurrency prices, and active social media engagement.Variables such as the length and technical content of the whitepaper, the existence of bonus schemes, and the number of team members significantly influence project success. The study's models show consistent results, emphasizing the need for quality information and effective signaling to attract investment.

This research confirms that quality signals provided by project promoters, such as detailed whitepapers and active social media engagement, positively influence ICO project outcomes. The findings highlight the importance of information exchange and feedback in the open systems model of ICOs. Higher levels of quality information lead to more successful projects.

The study contributes to ICO literature by integrating systems theory and signaling theory to analyze success factors. It provides a framework for understanding ICOs as open systems with information asymmetries and the need for effective signaling. For regulators, the findings emphasize transparency and accountability in ICO projects. Promoters should focus on detailed whitepapers, favorable timing related to cryptocurrency prices, short campaign periods, and well-managed social networks to enhance success.

The study's limitations include the focus on the banking/financial sector and the exclusion of some variables due to collinearity.Future research could explore success factors in other industries, the behavior of tokens in secondary markets, and the internal dynamics of ICO projects. Further analysis of specific variables, such as whitepaper content and team characteristics, could provide deeper insights into ICO success determinants.