The Biggest Secrets of Successful ICOs
- The identity of the team and its social media following was found to have a very small effect.
A great whitepaper, well rated code, shorter funding period and even larger units of tokens help an Initial Coin Offering (ICO) to raise larger funds, a study of 238 ICOs in 2016 and 2017 showed.
The paper titled ‘Initial coin offerings (ICOs) to finance new ventures: An exploratory study’ was published by Christian Fisch, a scholar from the Faculty of Management in Trier University in Germany in March.
While the study covers an array of topics related to the ICO space, the author attempts to define the aspects that can be used to determine whether a fundraising venture is of a high quality and will thus likely succeed.
The Characteristics of a Successful ICO
The study found that the variables could be broken down into three subheadings namely: the characteristics of the ICO, the characteristics of the venture, and the technological characteristics.
Under the ICO characteristics, Fisch found that shorter funding periods have led to higher amounts. Moreover, ICOs with larger units of its tokens were able to achieve higher valuations. This is likely related to a psychological bias. “Investors may find it more attractive to buy a larger amount of tokens at a lower price per token instead of buying fewer tokens at a higher price.” Lastly, the price of bitcoin affects the valuation of an ICO as many projects use BTC as their contribution currency.
The technological characteristics of a project were found to have the largest influence on the success of an ICO. This is understandable given the fact that ICOs are essentially based on technological innovation.
The findings suggested that a project with a long, detailed and accurate paper is likely to perform well. The study came to the conclusion that an unsatisfactory whitepaper was very harmful to the chances of success. “Both variables indicate that a poor whitepaper may harm an ICO, and ventures would be better off having no white paper at all.”
In addition, the ICO was likely to perform better if the team posted its code on Github. However, it is important to note that this action only helped the ICO if the code was rated highly using Github’s internal rating system. “The number of stars awarded to the code on GitHub can be interpreted as a signal of better quality, as it conveys the programming community’s opinion on the venture’s code. Indeed, a higher number of stars positively influences ICO valuation.”
Also, ICOs performed better if they used the ERC20 tokens. “An explanation is that building on an already established platform potentially enables scale effects and decreases risk when compared with creating a completely novel technology.”
The characteristics of a blockchain venture were found to have little to no bearing on the success of an ICO. The geographical location of the project did not affect the amounts raised. “This result likely stems from the online setting of both crowdfunding and ICOs, which makes the locational proximity between investor and venture less important.” Moreover, the identity of the team and its social media following was found to have a very small effect, if any on the token sale’s success.
Why is it Important to Create an ICO Evaluation System?
Creating a system through which token sales can be evaluated is beneficial for the growth of the sector because it provides a certain level of protection for investors while ensuring that high-quality projects are able to acquire the funding they need. “This information asymmetry is particularly pronounced for small investors, who often do not have the resources and experience of larger investors when evaluating investments, potentially leading to low-quality ventures receiving high amounts of funding or high-quality ventures receiving low funding,” Fisch states in his paper.
While this is essential for the growth of the cryptocurrency space as well as technological advancements in general, it is especially important for small investors because the success of the venture is closely related to the return on investment they will receive. Moreover, as the market continues to get inundated with scams, it is important to know how to identify the ICOs that are fraudulent.
Noting that ICO launches are generally fraught with a minimal amount of public information, Fisch explains that it is important to be able to decipher the available information in order to make the right decisions with regard to investing in the fundraising ventures.