Assessing the Impact of Hype on Blockchain-based Cryptocurrency: The Case of Initial Coin Offerings

Abstract

The rapid development of blockchain technology enriches the variety of digital assets, such as in-game assets, crypto collectibles, and artwork ownership, making Initial Coin Offering (ICO) the main financing channel for blockchain projects. Since the market for ICOs lacks regulation and scrutiny, blockchain companies rely on “digital hype” as a marketing tool to promote their products. The authors examine the effects of this hype during ICOs on blockchain-based projects on project outcomes. Based on information economics, we consider hype scores as a set of predominately prelaunch marketing activities that perpetuate cheap talk signals to promote radically new and high-risk cryptocurrencies. The authors analyze a comprehensive and manually collected dataset of more than 2,479 ICOs between 2014 and 2019 and track the project status of ICOs after issuance. After correcting for potential selection and endogeneity issues using the Heckman two-step and instrumental variable methods, results show that hype scores positively affect the success of blockchain projects. Searching for a mechanism reveals that information asymmetry may lead to “bad money driving out good money” since the desire to raise money successfully may lead some low-quality projects to over-hype themselves at the ICO stage, further hurting market efficiency. To assess the heterogeneity of the effect, the authors construct a competitive network to describe the competitive relationships among projects and find that the competitive intensity moderates the hype signal effect When a blockchain project faces competition from multiple similar projects, the signals emitted by the hype score will become blurred.

Tong Wang

Senior Lecturer in Business Economics

My research interests include Economics Theory, Crypto-finance and Digital Economics.