A new study has useful insights for cryptocurrency investors.
Around 56 percent of digital coin startups that raise funds through crowd-funded token sales are dead within four months of their initial coin offerings (ICO), a study by Boston College researchers reveals. The findings go in sync with a recent report that highlighted a massive number of cryptocoins dying. (For more, see Crypto Carnage: Over 800 Cryptocurrencies Are Dead.)
Only 44% ICOs Survive First Four Months
Comparing the ICO development to the tulip mania that gripped Holland and spanned across Europe during the early 1600s, the report titled “Digital Tulips? Returns to Investors in Initial Coin Offerings” finds that only 44.2 percent of cryptocurrency startups are able to survive the 120 day period after the end of their ICOs. The report was prepared by researchers Hugo Benedetti, a finance PhD student, and Leonard Kostovetsky, an assistant professor at Boston College’s Carroll School of Management.
The researchers also found clear evidence of significant underpricing of ICOs. This observation is based on positive average returns of 179 percent of the opening market price on the first trading day as compared to the ICO price. Based on their findings, Kostovetsky told Bloomberg that “acquiring coins in an ICO and selling them on the first day is the safest investment strategy.” Since individual investors may miss out on the ICO participation, he recommends that individuals should exit within first six months.
After trading starts, cryptocurrencies continue to gain, and generate an average buy-and-hold abnormal returns of 48 during the first 30 trading days. "What we find is that once you go beyond three months, at most six months, they don’t outperform other cryptocurrencies," Kostovetsky said. "The strongest return is actually in the first month."
Another inference made from the research was that returns on ICOs are much lower today than they were in the recent past. It indicates that investors have become cautious over time, as the number of people jumping on the ICO investing is increasing making the markets more efficient and moving towards better price discovery.
The study was performed on a dataset comprising of 4,003 executed and planned ICOs that collectively raised a total capital of around $12 billion between January 2017 and May 2018. (See also, 80% of ICOs Are Scams: Report.)
Investing in cryptocurrencies and 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 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 no cryptocurrencies.