In popular narrative, initial coin offerings (ICOs) have become infamous for scandals and scams. But they’ve also generated outsized returns for some investors willing to tolerate the high risks associated with them.

A Boston College study recently analyzed ICO data over various timelines and found that the risk of ICOs is commensurate with their rewards. According to the study, an average investor earns returns of 179% from the ICO price to the first day’s opening market price. They earn 82% even if there is a lag of more than 60 days after listing of tokens and 48% some 30 days after trading begins. “ICO returns are positive and significant when the cryptocurrency asset class is performing well but also when it is performing poorly, indicating that the results are not an artifact of the strong overall performance in cryptos over the last few years,” the researchers wrote. 

To arrive at their conclusions, authors Hugo Benedetti and Leonard Kostovetsky created a dataset of 4,003 executed and planned ICOs which raised $12 billion in capital. The authors also put the multiple scams that have plagued ICOs into perspective, stating that their data shows that “scams, while plentiful in number, are not as important in terms of stolen capital because investors are shrewd enough to spot (and underfund) them.” But they have not provided examples of such instances. (See also: How Companies Use Initial Coin Offerings). 

Underpriced ICOs

ICO valuations may seem exorbitant and expensive to some but the authors state that ICOs are, in fact, underpriced due to the pop in their prices after being listed on cryptocurrency exchanges. 

There are several reasons for underpricing of ICOs. 

For example, the authors state that blockchain and cryptocurrency entrepreneurs are inexperienced in pricing their tokens. According to some, the initial price is set by owners. That may probably be due to the fact that ICOs sell a product that has not yet been created. The absence of underwriting firms, who calculate an initial price for a company’s shares based on its revenue and profits, further complicates matters. The study also estimated that the survival rate of startups 120 days from the end of an ICO, is only 44.2%. 

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 small amounts of bitcoin and litecoin.