Can Wisdom of Crowds Replace Analysts And Experts During An ICO?

How should investors evaluate an initial coin offering (ICO)? 

Even as the market and investors for ICOs have multiplied in recent times, little is known about the means to evaluate such offerings. That ICOs are conducted without an actual product in place only complicates matters further. Initial public pfferings (IPOs), which have a similar rationale and process, use underwriters and analysts to bridge the “asymmetry of information” between investors and companies. But similar experts are absent within the ICO ecosystem primarily because blockchains are built on a decentralized information model without intermediaries. Instead, investors in initial coin offerings rely on information and opinion from a variety of informal channels, such as crypto experts on social media and pronouncements by thought leaders, to arrive at an understanding of the offering. 

A new study suggests that these channels are as effective, if not more, as compared to the apparatus of qualified analyst experts and underwriters for a stock market pick. 

“Our results suggest that the wisdom of crowds could effectively substitute the intermediary role played by traditional underwriters in financing decentralized blockchain-based startups,” write a team of researchers from the University of Florida and Princeton University. The researchers analyzed a sample of 1,549 COs completed from January 2016 to March 2018 and found that a diverse opinion set from multiple channels screens out “lemons” and “generates an information cascade during initial periods of the sale, encouraging subsequent investors to invest regardless of their information.” “The independent and diverse opinions from a number of informed online analysts lead to an aggregate signal that closely reflects the true quality of the risk,” the researchers write. (See also: ICOs Have Raised A Staggering $10 Billion This Year). 

What Determines A Successful ICO? 

In their quest to determine the dynamics of a successful ICO, the members of the team have listed a number of factors that determine the success or failure of an ICO. For example, a presale of ICO tokens boosted its chances of later success by 15.2% because the presale was construed as a signal that earlier investors held favorable information (and opinion) about the ICO. Online chatter about an ICO is also important while considering its future prospects. In general, the number of experts covering a token sale positively predicts fundraising success, the paper’s authors write. 

One of the more interesting findings of the paper is related to the ICO’s geographical coverage. ICOs featuring multi-language whitepapers/websites or accepting multiple currencies are more likely to succeed because they are indicators of global coverage and ease of transactions with an expanded set of payments, according to the paper’s authors. However, attempts to impose better governance practices, such as KYC provisions, on a fundraising mechanism that has largely escaped regulatory scrutiny can negatively affect an ICO’s chances in the market. This is because they are associated with higher transaction costs and reduced participation (and returns) for outside investors.

Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns bitcoin and litecoin.