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Blockchain Hype: Evidence from Initial Coin Offerings

Chen Feng†, Nan Li#*, Franco Wong#, and Mingyue Zhang#
† School of Engineering, University of British Columbia, Kelowna, BC
# Rotman School of Management, University of Toronto, Toronto, ON
* Department of Management, University of Toronto, Scarborough, ON

Blockchain technology has a great potential to fundamentally change different aspects of businesses (Catalini and Gans 2016; Tapscott and Tapscott 2016; Yermack 2017). Satoshi Nakamoto invented blockchain to create the first digital currency, Bitcoin, in 2008. Since then, many applications and cryptocurrencies have been developed on top of the Bitcoin blockchain platform. The technology also provides a new means for developers to raise funds via the process called “initial coin offering” (ICO). In 2013, Mastercoin launched the first ICO and raised about $500,000 in bitcoin. Subsequently, other blockchain platforms, including the most popular Ethereum, with more functionalities have been created, making it easier to create new blockchain-based applications and raise capital via ICOs. With bitcoin price jumped from $100 in 2013 to almost $20,000 in late 2017, cryptocurrencies became popular among both retail and institutional investors1. The cryptocurrency mania created a huge demand for ICOs, making it easy for entrepreneurs to raise capital. Indeed, ICOs raised over $6.2 billion in 2017 and over $7.8 billion in 2018. The average amount of capital raised in an ICO is 10 to 20 times that of a non-blockchain-based startup at an equivalent stage of development (HBR, 2018).

The cryptocurrency mania and associated ICO boom raised concerns from regulators and the investment community. ICOs are not regulated in most jurisdictions and, therefore, misconducts and scams are major concerns2. In particular, some ICO issuers provide promotional materials about their projects that were later proven to be fake3. Furthermore, some entrepreneurs choose ICO over other fundraising means to take advantage of the lax regulatory environment and hype in blockchain, even though their projects do not need to use blockchain.

The concern that ICO issuers may exploit the blockchain hype and cryptocurrency mania comes from experience that many entities have taken advantage of investor sentiment. Malkiel (1999) documents a history of investing manias: The Dutch Tulip mania in the 1630s, English South Sea Bubble of 1720, and Japanese real estate and stock market bubble in the 1980s. More recently, we witness the dotcom boom and bust in the 2000s (Cooper et al. 2001), as well as the blockchain mania in the 2010s (Cheng et al. 2019).

In this study, we investigate the extent to which ICO issuers exploit the blockchain hype and the resultant economic consequences. We use ICO as a setting to identify blockchain hype because blockchain is a unique feature of all ICOs and it distinguishes ICO issuers from other early-stage startups. Since all ICOs use a blockchain platform, we can apply the same methodology to identify whether they use blockchain technology as hype or not.

We examine whether an entrepreneur exploits the blockchain hype by assessing whether its project needs to use a blockchain or not. We adopt the framework of Wust and Gervais (2019), among others, that analyzes different blockchain types to determine whether blockchain technology is indeed the appropriate technical solution for a particular application scenario. In particular, we evaluate whether an ICO project has its digital token as an integral part of its product/service provided by its blockchain platform and whether it provides enough information on what its digital tokens can do. If the entrepreneur uses an ICO to raise capital even though blockchain is not necessary for his/her project, he/she is likely taking advantage of the hype in blockchain to attract investors.

We select a random sample of 355 from 1,583 ICOs with available white papers during the period January 2016 through June 2018. We collect information on these ICOs from their white papers, which are the most common means used by ICO issuers to communicate with prospective investors. We take the white paper information as given and do not question its reliability, even though the Securities and Exchange Commission (SEC) investigated a few ICOs and found fraud in the white papers. However, if an ICO project is fake, it is not likely that it will have a legitimate reason to use a blockchain. Hence, our detailed assessment of its underlying blockchain technology will assign it a low rating. To the extent that our assessment fails to flag fake ICO projects, we will underestimate the number of ICOs that do not need to use a blockchain.

We document two key results. First, we find that over 80% of the ICOs do not need to use a blockchain. In other words, only 55 out of the 355 ICOs in our sample have their digital tokens as an integral part of their products/services provided by their blockchain platforms. Of the remaining ICOs, 200 provide products/services not directly tied to their blockchains, and 100 do not disclose enough information on what their digital tokens can buy or they simply use ICOs as a fundraising platform. This result suggests that a majority of the ICO issuers are using “blockchain” as a hype to attract investors.

Second, univariate statistics show that 59% of the ICOs that do not need a blockchain was successful in raising an average of $6.1 million. To the extent that these ICOs used “blockchain” as a hype, their token investors could suffer potential losses. After controlling for other project-, issuer-, and token-related characteristics in a multivariate analysis, we show that those ICO projects that do leverage the blockchain technology, meaning blockchain technology is an appropriate technical solution to the business problem, raised more funds and are more likely to have their digital coins/tokens listed on a cryptocurrency exchange. These findings are consistent with ICO token investors (cryptocurrency exchanges) considering the extent to which the blockchain technology is incorporated into ICO projects when making their investing decisions. Hence, token ICO investors are not fooled by the blockchain hype4. More importantly, we find that investors put more emphasis on the blockchain technology used by ICO projects after the cryptocurrency crash in last 2017 than before. This finding lends further support to our conjecture that ICO issuers took advantage of the blockchain hype and ICO investors cared less about blockchain technology during the hype. Once the cryptocurrency crash bursts the bubble, ICO issuers can no longer use blockchain as a way to profit from investor sentiment.

This study contributes to the emerging ICO literature (e.g., Howell et al. 2019). In general, it is difficult to access the fundamentals of ICO projects, because they are early-stage, pre-revenue ventures. Hence, prior studies capture ICO fundamentals using features such as disclosure/transparency, credible commitment to the project, signals of quality, and quality of management team. Our study is the first one to analyze ICO projects’ underlying blockchain technology in detail. We believe that the richness we gain from our detailed analysis of the blockchain technology is a novel contribution to the ICO literature.

We also contribute to the literature on market mania. Our study is closely related to two of these studies. Cooper et al. (2001) find that during the internet boom, firms that added “.com” to their names would obtain a permanent stock price increase. Recently, Cheng, De Franco, Jiang, and Lin (2019) has shown that publicly-traded firms that mentioned speculative blockchain-related investment would enjoy a positive but transitory stock price increase. Adding to this literature, we document that over 80% of the ICO issuers took advantage of the blockchain hype by using ICO to raise funds even though blockchain is not the right solution for their products or services. More importantly, we find that ICO investors pay more attention to the ICO projects’ underlying blockchain technology after the cryptocurrency crash.

The full paper can be found at

ªWe acknowledge financial support from the Natural Sciences and Engineering Research Council of Canada (Feng), Rotman CPA Ontario Centre for Accounting Innovation Research, and Social Sciences and Humanities Research Council of Canada (Li and Wong).

See “Morgan Stanley: Bitcoin is a New Institutional Investment Class” by Jimmy Aki (Yahoo! Finance, November 1, 2018) and “Cryptocurrency Mania Goes Beyond Bitcoin” by Lily Katz (Bloomberg, May 24, 2017).


Venture capitalists and hedge fund managers also participate in ICOs. See, “Cryptocurrency Mania Fuels Hype and Fear at Venture Firms” by Erin Griffith (Wired, September 11, 2017) and “Sequoia and Andreessen Horowitz Are Backing This Cryptocurrency Hedge Fund” by Jen Wieczner (Fortune, July 26, 2017).


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