Profitability of initial coin offerings: potential factors and impact of bull and bear cycles in cryptocurrency market
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Abstract. 4
Introduction. 8
Chapter 1. Literature review. 18
1.1 Research gaps development. 18
1.2 Factors influencing profitability of ICO. 19
1.3 Indicators of ICO profitability. 24
1.4 Indicators of cycles of cryptocurrency market. 25
Chapter 2. Methodology. 26
2.1 Dataset. 26
2.2 Variables. 28
2.3 Descriptive statistics. 33
2.4 Regressions and tools for analysis. 35
Chapter 3. Results. 37
3.1 Regression on the total dataset. 37
3.2 Regressions on Bull cycle dataset. 40
3.3 Regressions on Bear cycle dataset. 45
3.4 Summary of developed results. 50
Conclusion 53
References. 59
Appendix 1. 63
Appendix 2. 64
Appendix 3. 65
Appendix 4. 66
Appendix 5. 67
Appendix 6. 68
Introduction. 8
Chapter 1. Literature review. 18
1.1 Research gaps development. 18
1.2 Factors influencing profitability of ICO. 19
1.3 Indicators of ICO profitability. 24
1.4 Indicators of cycles of cryptocurrency market. 25
Chapter 2. Methodology. 26
2.1 Dataset. 26
2.2 Variables. 28
2.3 Descriptive statistics. 33
2.4 Regressions and tools for analysis. 35
Chapter 3. Results. 37
3.1 Regression on the total dataset. 37
3.2 Regressions on Bull cycle dataset. 40
3.3 Regressions on Bear cycle dataset. 45
3.4 Summary of developed results. 50
Conclusion 53
References. 59
Appendix 1. 63
Appendix 2. 64
Appendix 3. 65
Appendix 4. 66
Appendix 5. 67
Appendix 6. 68
The topic of cryptocurrency has been gaining attention since the first creations that appeared in this filed, that started in year 2009, when the Bitcoin Whitepaper was posted to the web and this move had stated the beginning of the crypto market. Whitepaper – is the document outlining the “overview of the project’s goals, tokenomics, products, features, and information about the team” (Binance Academy, 2022). Thus, basing on this professional explanation, stating that the first project/company and instrument in thefield of finance was created just in 2009, which leads to the point of the modernity of cryptocurrency sphere for finance. In particular the whitepaper of Bitcoin as mentioned in the glossary conducted by United States Sentencing Commission, is: “a document that describes the original plan and protocol for Bitcoin” (United States Sentencing Commission, 2018). Furthering in the history of the crypto sphere development, there was and even now there is a continuous trend of rally in the capitalization of cryptocurrency market, which is leading to the point of nearly every year increase of the participants in the cryptocurrency and is indicating the potential for further development.Every bull market that was experienced in cryptocurrencies had brought more and more attention of retail investors, governments,and researchers, which aimed to diversify the analytics on this sphere and in particularly even now are trying to assess the trends in this industry.
Motivation for research.
Diving further in the theme of the sky rocketing popularity of cryptocurrencies, it's logically to assess the points of cryptocurrency indices, which are created in cryptocurrencies just same as in any niche of finance to assess the overall market capitalization and to assess the whole size of the market, current and historical conditions, or cycles of the market. Thus, same as traditional financial markets have benchmarks like the S&P 500 or the Dow Jones Industrial Average, for example S&P500 as it is stated by the S&P Global Ratings is “a proxy of the U.S. equity market, the index is composed of 500 constituent companies.” (S&P Global) which is making the overview of the whole USA market, the cryptocurrency sphere has its own equivalent: the market capitalization index of the entire cryptocurrency industry.This index is constructed by the top analytics organization in crypto sphere, the CoinGecko, as it is stated at their methodology the Global Cryptocurrency Market Cap is “total market cap & volume of cryptocurrencies globally, a result of 14,005 cryptocurrencies tracked across 1,057 exchanges.”(CoinGecko, 2024).Basing on the explanation this index is providing analysts with a comprehensive snapshot of the overall performance of the cryptocurrency market. Here is the current state of this index.
This index basically provides the insights about the development of the sphere of the cryptocurrency, the new trends in the coins creation and the attraction of new investments into the topic. Therefore, looking at the chart it can be clearly understanded that the capitalization of cryptocurrency total market is gaining the turnover very quickly and the continuous rally trend is generally observed in any timeline of the graph, adding the point that currently its at its all time high position again. Moreover, the swing in the 2023 that is depicted on the graph, the turn to the upside of the capitalization is stating the increasing popularity of the sphere in current times, which is stating the importance of this industry and also stating a point that it is still a new developing industry in which it will be extremely interesting to conduct scientific research.
Overall, the emergence of cryptocurrency indices represents a significant milestone in the evolution of digital assets, providing a standardized framework for evaluating and benchmarking the performance of the fluctuating and developing cryptocurrency market.
Motivation for this research is set by basing in the listed above valuable points and developments in the cryptocurrency, as they are clearly stating the point that cryptocurrency sphere is a new and extremely fast developing niche in finance which is there to stay in future.
Topic of Initial Coin Offerings.
In the traditional finance sphere, the topic of financing initiatives and projects stands as a base foundation point, as it is majorly one of the points for which the discipline of finance was created. Similarly, within the cryptocurrency part of the sphere of finance, the subject of getting financing holds one of the core importance. However, what distinguishes the cryptocurrency sphere is its innovative approach to obtaining funding, as since the creation of a worlds’ first cryptocurrency, Bitcoin, companies operating within the crypto space have pioneered a wide diversity of new methods of securing financing, most notably through Initial Coin Offerings (ICOs). As it is stated by Huang et al., an Initial coin offering (ICO) is a "decentralized method of financing, whereby a firm calls for funding by issuing coins to online investors." (Huang et al., 2021). Which in general means that by conducting an ICO company using the blockchain technology and programming codes adds on called smart contracts can achieve to aim of getting finance through issuing it’s cryptocurrency on the market. Moreover, great advantage of this way is that the investment in Initial coin offering does not have any constraints or limitations for potential investors, besides the size of the offering. Therefore, the investment in ICO is generally opened to any investor that solely has the wish to invest in the coin, thus this way of getting finance may be more opened to investors.
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Motivation for research.
Diving further in the theme of the sky rocketing popularity of cryptocurrencies, it's logically to assess the points of cryptocurrency indices, which are created in cryptocurrencies just same as in any niche of finance to assess the overall market capitalization and to assess the whole size of the market, current and historical conditions, or cycles of the market. Thus, same as traditional financial markets have benchmarks like the S&P 500 or the Dow Jones Industrial Average, for example S&P500 as it is stated by the S&P Global Ratings is “a proxy of the U.S. equity market, the index is composed of 500 constituent companies.” (S&P Global) which is making the overview of the whole USA market, the cryptocurrency sphere has its own equivalent: the market capitalization index of the entire cryptocurrency industry.This index is constructed by the top analytics organization in crypto sphere, the CoinGecko, as it is stated at their methodology the Global Cryptocurrency Market Cap is “total market cap & volume of cryptocurrencies globally, a result of 14,005 cryptocurrencies tracked across 1,057 exchanges.”(CoinGecko, 2024).Basing on the explanation this index is providing analysts with a comprehensive snapshot of the overall performance of the cryptocurrency market. Here is the current state of this index.
This index basically provides the insights about the development of the sphere of the cryptocurrency, the new trends in the coins creation and the attraction of new investments into the topic. Therefore, looking at the chart it can be clearly understanded that the capitalization of cryptocurrency total market is gaining the turnover very quickly and the continuous rally trend is generally observed in any timeline of the graph, adding the point that currently its at its all time high position again. Moreover, the swing in the 2023 that is depicted on the graph, the turn to the upside of the capitalization is stating the increasing popularity of the sphere in current times, which is stating the importance of this industry and also stating a point that it is still a new developing industry in which it will be extremely interesting to conduct scientific research.
Overall, the emergence of cryptocurrency indices represents a significant milestone in the evolution of digital assets, providing a standardized framework for evaluating and benchmarking the performance of the fluctuating and developing cryptocurrency market.
Motivation for this research is set by basing in the listed above valuable points and developments in the cryptocurrency, as they are clearly stating the point that cryptocurrency sphere is a new and extremely fast developing niche in finance which is there to stay in future.
Topic of Initial Coin Offerings.
In the traditional finance sphere, the topic of financing initiatives and projects stands as a base foundation point, as it is majorly one of the points for which the discipline of finance was created. Similarly, within the cryptocurrency part of the sphere of finance, the subject of getting financing holds one of the core importance. However, what distinguishes the cryptocurrency sphere is its innovative approach to obtaining funding, as since the creation of a worlds’ first cryptocurrency, Bitcoin, companies operating within the crypto space have pioneered a wide diversity of new methods of securing financing, most notably through Initial Coin Offerings (ICOs). As it is stated by Huang et al., an Initial coin offering (ICO) is a "decentralized method of financing, whereby a firm calls for funding by issuing coins to online investors." (Huang et al., 2021). Which in general means that by conducting an ICO company using the blockchain technology and programming codes adds on called smart contracts can achieve to aim of getting finance through issuing it’s cryptocurrency on the market. Moreover, great advantage of this way is that the investment in Initial coin offering does not have any constraints or limitations for potential investors, besides the size of the offering. Therefore, the investment in ICO is generally opened to any investor that solely has the wish to invest in the coin, thus this way of getting finance may be more opened to investors.
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All things considered, this research has covered the literature review that pointed out an interesting areas for tailoring the research in, which are addressing information asymmetry among various investors in the cryptocurrency market by conduction of the research at the sources which are opened to general retail investors and gain potential insights from there, and the point of interest in comparison of the influences that factors have on the profitability of initial coin offerings across two cycles in cryptocurrency market: bull and bear cycles. These, topics firstly were examined by conducted thorough scientific literature assessment which focused at gaining the potential factors to include in the practical side of the research and moreover the literature provided insights on potential peculiarities of bull and bear cycle comparisons. To further the potential insights that were gained during literature assessment the proper datasets were constructed with use of transparent trusted sources at cryptocurrency market to conduct the regression to assess the significance of these factors chosen during the literature assessment and also basing on the internal logic of factors. The regression models offered a comprehensive examination of Initial coin offerings by analyzing their profitability through different phases of market sentiment—specifically, during periods of economic optimism which is a bull cycle and pessimism as bear cycle. The application of regression models to these distinct market conditions has yielded various insights into the determinants of ICO profitability, showing in particular how certain factors take on different levels of significance depending on the cryptocurrency market's cycle.
Finalizing the ideas developed by the thesis, about how the influences of factors affecting profitability of initial coin offerings across 2 cycles bull and bear of cryptocurrency market, it is better to firstly state the findings about the main goal of the paper and hypothesis about the existence of the differences in impacts across cycles, and then develop managerial implications. For both cycles of cryptocurrencies, the paper had provided specific factors influencing the profitability of initial coin offerings and the common factors, therefore listing them below. For short term profitability of ICO, the factors of influence and their fluctuations across cycles are the following:
Firstly, the total raise had showed different effect compared to the effect on the bear cycle, during bull cycle higher total raise decreases the short-term profitability of initial coin offering, while on bear cycle it does not provide any statistically significant effect on the profitability of ICO. Then, the price at ICO also provided different effect across bull and bear cycles at cryptocurrency market. On bull cycle higher price of the coin at ICO decreases the short-term profitability, while on the bear cycle it does not affect profitability in any way.Thirdly, the GameFi industry had provided different influence on the profitability of ICO across bul land bear cycle, as on the bull cycle if the project conducting ICO is operating GameFi industry than it increases the profitability of initial coin offering, while during bear cycle there is no such linkage.Next factor is the DeFiindustry and it provided also different results for bull and for bear cycle. At the bull cycle of cryptocurrency market projects that are operating in the DeFi industry have higher ICO short term profitability. While on the bear cycle there is no such effect of DeFi industry.
As for the factors that kept their impact significant across cycles are following factors:
The popularity of the coin, which is the total interest at google search for 1 month during ICO for the name of the project conducting ICO. On both bull and bear cycle it had concluded that higher popularity increases the short-term profitability of initial coin offerings.The whitepaper publishment also provided same effect on both cycles and leaded to the conclusion that published transparently whitepaper at cryptorank.io, as a most popular organization aggregating information about ICOs, increases the short-term profitability of the offering.
Factors that provided no significant impact on the short-term profitability on both datasets:
Number of launchpads, funds investment into the project before ICO, usage of binance smart chain blockchain to issue a coin have provided no difference in the effect across cycles and did not have a statistically significant effect on the short-term profitability of initial coin offering. Therefore, such factors should not be considered while conduction of the investment decision about initial coin offering.
Turning to the long-term profitability of ICO assessment, regressions analysis had provided that on the long term horizon, at which effects of factors can be diluted due to other consequences that occurred during the year, however the publishment of whitepaper is the factor which is still increasing highly the profitability of the ICO leading to the point that transparent publishment of the whitepaper on both cycle is signalizing the investors that the project is well developed and this way it increases the attractiveness of the issued coin for the investors. All other factors considered in the research did not provide any statistically significant relationships. Moreover, very interesting insight was derived from the dataset peculiarities, it was found that 1 year after ICO the majority of the cryptocurrencies fall lower the ICO price value therefore making nearly 82% of the initial coin offerings (calculated based on the distribution of the price changes) not profitable after 1 year for the investment in them. This way, these points about long term investment into ICO leads to the adding conclusion that investment into the initial coin offerings are more short term oriented instruments than long term, as the highest return is provided on the short term horizon, in particular the 2 weeks horizon is greater in the profits side than long term horizon.
...
Finalizing the ideas developed by the thesis, about how the influences of factors affecting profitability of initial coin offerings across 2 cycles bull and bear of cryptocurrency market, it is better to firstly state the findings about the main goal of the paper and hypothesis about the existence of the differences in impacts across cycles, and then develop managerial implications. For both cycles of cryptocurrencies, the paper had provided specific factors influencing the profitability of initial coin offerings and the common factors, therefore listing them below. For short term profitability of ICO, the factors of influence and their fluctuations across cycles are the following:
Firstly, the total raise had showed different effect compared to the effect on the bear cycle, during bull cycle higher total raise decreases the short-term profitability of initial coin offering, while on bear cycle it does not provide any statistically significant effect on the profitability of ICO. Then, the price at ICO also provided different effect across bull and bear cycles at cryptocurrency market. On bull cycle higher price of the coin at ICO decreases the short-term profitability, while on the bear cycle it does not affect profitability in any way.Thirdly, the GameFi industry had provided different influence on the profitability of ICO across bul land bear cycle, as on the bull cycle if the project conducting ICO is operating GameFi industry than it increases the profitability of initial coin offering, while during bear cycle there is no such linkage.Next factor is the DeFiindustry and it provided also different results for bull and for bear cycle. At the bull cycle of cryptocurrency market projects that are operating in the DeFi industry have higher ICO short term profitability. While on the bear cycle there is no such effect of DeFi industry.
As for the factors that kept their impact significant across cycles are following factors:
The popularity of the coin, which is the total interest at google search for 1 month during ICO for the name of the project conducting ICO. On both bull and bear cycle it had concluded that higher popularity increases the short-term profitability of initial coin offerings.The whitepaper publishment also provided same effect on both cycles and leaded to the conclusion that published transparently whitepaper at cryptorank.io, as a most popular organization aggregating information about ICOs, increases the short-term profitability of the offering.
Factors that provided no significant impact on the short-term profitability on both datasets:
Number of launchpads, funds investment into the project before ICO, usage of binance smart chain blockchain to issue a coin have provided no difference in the effect across cycles and did not have a statistically significant effect on the short-term profitability of initial coin offering. Therefore, such factors should not be considered while conduction of the investment decision about initial coin offering.
Turning to the long-term profitability of ICO assessment, regressions analysis had provided that on the long term horizon, at which effects of factors can be diluted due to other consequences that occurred during the year, however the publishment of whitepaper is the factor which is still increasing highly the profitability of the ICO leading to the point that transparent publishment of the whitepaper on both cycle is signalizing the investors that the project is well developed and this way it increases the attractiveness of the issued coin for the investors. All other factors considered in the research did not provide any statistically significant relationships. Moreover, very interesting insight was derived from the dataset peculiarities, it was found that 1 year after ICO the majority of the cryptocurrencies fall lower the ICO price value therefore making nearly 82% of the initial coin offerings (calculated based on the distribution of the price changes) not profitable after 1 year for the investment in them. This way, these points about long term investment into ICO leads to the adding conclusion that investment into the initial coin offerings are more short term oriented instruments than long term, as the highest return is provided on the short term horizon, in particular the 2 weeks horizon is greater in the profits side than long term horizon.
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