Technological Forecasting & Social Change 153 (2020) 119915

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Technological Forecasting & Social Change

journal homepage: www.elsevier.com/locate/techfore

What factors drive returns on initial coin offerings? T

a b b
Ribeiro-Soriano Domingo , Juan Piñeiro-Chousa , M. Ángeles López-Cabarcos
a
Universitat de València, Spain
b
Santiago de Compostela University, Spain

A R T I C LE I N FO A B S T R A C T

Keywords: In recent years, initial coin offerings (ICOs) have received considerable attention as a new form of crowdfunding.
Initial coin offering Because of the rapid growth in their popularity, ICOs have become a prominent research topic. However, the
Cryptocurrencies lack of knowledge about the nature of this kind of financial operation inevitably raises several important un-
Blockchain answered questions. This study starts by providing a comprehensive description of the characteristics, benefits,
Microblogging sentiment
and risks associated with ICOs. Then, using a panel data set comprising daily information for 125 ICOs (44,217
observations gathered from December 2017 to December 2018), this study explores the influence of the ICO
presale period, ICO category, Bitcoin spot returns, Bitcoin futures returns, and sentiment extracted from social
media on ICO returns. The results suggest that while Bitcoin spot and Bitcoin futures returns exert a positive
influence on ICO returns, the existence of a presale period exerts a negative influence, and ICO category seems to
be non-significant. Sentiment extracted from social networks positively influences ICO returns. Further con-
clusions of this study are presented in the last section.

1. Introduction
Crowdfunding has become a valuable alternative source of external
funding through open calls on the Internet (Belleflamme et al., 2014).
Crowdfunding success depends on several determinants, which should
be identified to organize them and to compare their potential effects
(Angerer et al., 2018; Bellavitis et al., 2017). These determinants in-
clude pledge amount, number of backers, product or project category,
and location. Crowdfunding is increasingly used by new companies or
by new projects undertaken by established companies. Innovation and
technological advances move so quickly that new crowdfunding pos-
sibilities constantly arise. For example, initial coin offerings (ICOs) offer
a new form of finance in digital environments. As a hybrid of initial
public offerings (IPOs) and crowdfunding, ICOs have a disruptive effect
on the financing of early-stage projects. ICOs are open calls made over
the Internet to obtain cryptocurrencies in exchange for “tokens” (i.e.,
digital assets). ICOs are based on blockchain technology, which can
reduce the cost of raising capital by bypassing intermediaries, making
these transactions more secure. The distributed ledger technology that
underlies Bitcoin and other cryptocurrencies has transformed the ca-
pital-raising opportunities democratizing access to capital. ICOs can
promote competition between buyers, business decentralization, and
project growth. ICOs thereby provide flexibility and agility. However,
until now ICOs entail major risks associated with investor protection,
limited available information, unknown intentions of promoters,
attacks by hackers, and scant regulation. The unregulated space of ICOs
can be understood as a “lawless territory.”
Research has examined the influence of certain variables on ICO
success. The novelty of this type of financial operation and the current
lack of regulations mean that ICO success can be understood in a range
of ways. Many scholars have measured ICO success in terms of the
amount of capital a project raises (Ante et al., 2018). Others have
considered the venture's technological competencies to be a key factor
for evaluating the eventual success of an ICO (Fisch, 2019). Other au-
thors have reported that the probability of an ICO's success depends on
certain variables such us the availability of the source code, the ex-
istence of an ICO presale, and the possibility for investors to access a
specific service or share profits (Adhami et al., 2018). We focus on ICO
returns calculated as indicated by Campbell et al. (1997), which can
provide a more accurate proxy for the success of the ICO for investors.
More specifically, we analyze the influence of the following variables
on ICO returns: the existence of an ICO presale period, the category of
the model underlying the ICO, Bitcoin spot returns, Bitcoin futures re-
turns, and investor sentiment extracted from specialized social net-
works.
In many ICOs, preliminary offers in the form of presales of tokens
are used to ensure ICO success. If ICO success is measured as the
amount of capital a project raises, a presale period can be an optimal
way to obtain financing. However, the relationship is less clear when
success is measured in terms of ICO returns. Further research is needed

E-mail addresses: domingo.ribeiro@uv.es (R.-S. Domingo), j.pineiro@usc.es (J. Piñeiro-Chousa), angeles.lopez.cabarcos@usc.es (M. Ángeles López-Cabarcos).

https://doi.org/10.1016/j.techfore.2020.119915
Received 3 March 2019; Received in revised form 7 January 2020; Accepted 13 January 2020
Available online 24 January 2020
0040-1625/ © 2020 Elsevier Inc. All rights reserved.
R.-S. Domingo, et al.
to show the extent to which presales determine ICO returns. In addition,
ICO tokens can provide different benefits to investors. These benefits
include access to blockchain networks, the granting of several rights,
contribution to a project's development, and internal cryptocurrencies.
Regardless of the benefits of ICOs, it is important to determine whether
ICO returns depend on ICO design or ICO promoters’ intentions.
Undoubtedly, cryptocurrency transactions and their effects on business
activity together represent a prominent new research field. Bitcoin and
Ethereum have the highest trading volumes of all cryptocurrencies,
with Bitcoin being the first to appear in the market, and in some cases
being considered a speculative bubble (Baek and Elbeck, 2015;
Bouoiyour and Selmi, 2015; Cheah and Fry, 2015). Bitcoin has been the
most efficient cryptocurrency and hence the least predictable
(Brauneis and Mestel, 2018). On December 1, 2017, the Chicago Mer-
cantile Exchange and the Chicago Board Options Exchange opened
trading in Bitcoin futures contracts. Bitcoin spot and Bitcoin futures
prices seem to react asynchronously to market news. Therefore, it is of
interest to analyze how much Bitcoin returns and Bitcoin futures re-
turns influence ICO returns. Lately, cryptocurrencies have received
considerable media attention, which has led to a surge in their trading
volume, volatility, and price, together with their usual presence in the
mainstream news. However, to the best of our knowledge, no study has
explored the relationship between social network activity and ICO re-
turns. Thus, there is a need for further research to explore whether
investor sentiment extracted from specialized social networks through
language analysis software influences ICO returns. The aim of this
paper is to present rigorous analysis of the influence of all aforemen-
tioned variables on ICO returns.
A panel data set was compiled manually. This data set comprised
daily information for 125 ICOs (44,217 observations). The data set
comprised data on returns, ICO presale, ICO category, Bitcoin returns,
Bitcoin futures returns, and variation in social network sentiment about
Bitcoin. Dynamic panel data methodology was employed. A two-step
system generalized method of moments (GMM) estimator was used.
This paper advances our knowledge of ICOs. More specifically, it sheds
light on how ICO returns are influenced by the five key variables
mentioned earlier: the ICO presale period, the ICO category, Bitcoin
spot returns, Bitcoin futures returns, and investor sentiment extracted
from social networks.
The remainder of the manuscript is organized as follows. Section 2
describes the conceptual framework. Section 3 explains the research
design, data sources, and estimation model, including justification of
the choice of method and variables. Section 4 presents the main em-
pirical results and discusses their implications. Finally, Section 5 con-
cludes, suggesting future lines of research using the results of this study
as a springboard.
2. Literature review
2.1. Initial coin offering
As mentioned earlier, crowdfunding allows entrepreneurs to raise
funds from a large number of people through online platforms. These
platforms link entrepreneurs with funders who are interested in con-
tributing varying amounts of capital to projects that have previously
been selected based on a range of motivations (Mollick, 2014;
Schwienbacher and Larralde, 2012). Systems theory
(Karniouchina et al., 2013) can be used to study different entities to-
gether across different levels—for example, entrepreneurs, firms, and
industries (Scott and Davis, 2007). Because crowdfunding entails the
use of inputs from outside conventional boundaries, systems theory is
useful to understand how the external actors who contribute to
crowdfunding form part of an external system that interacts with an
organizational system (Geiger et al., 2011). Signaling theory explains
the relevance of specific information for investing in new projects
(Ahlers et al., 2015; Bogdan et al., 2018; Pamucar et al., 2018;
2
Technological Forecasting & Social Change 153 (2020) 119915
Robb and Robinson, 2014). These two theories form part of the
crowdfunding theoretical framework. Crowdfunding projects require
the design of a highly open system to invite a large number of external
elements. Thus, an even higher number of stimuli are generated, and
these stimuli can be used in business processes for encouragement,
inspiration, validation, retainment, or solutions (e.g., instant gratifica-
tion, enjoyable experience, and strong reputation; Doan et al., 2011).
Because the relationships between the external and internal actors of
the system are characterized by massive information asymmetry, sig-
naling theory can provide a suitable framework to explain how ventures
can reduce this asymmetry to attract funding. The existence of a re-
putation-related risk associated with the asymmetry between buyers
and sellers can be highlighted as the economic cost of “dishonesty.” In
this context, adverse selection is relevant. Signaling theory shows that
projects can send signals to potential buyers to inform about quality and
thereby try to attract more funding. According to the principle of full
disclosure or unraveling results (Grossman, 1981; Milgrom, 1981),
under ideal conditions, a company cannot hide significant information
about its own reputational valuation, which could be negatively inter-
preted by the market. Thus, potentially successful projects should send
signals that are observable and costly to realize and imitate to buyers to
attract greater funding and compensate information asymmetry
(Caby and Piñeiro, 2006).
Several questions should be answered before starting a crowd-
funding operation. Key questions include what types of organizations or
projects are likely to successfully use crowdfunding, what kinds of
variables or conditions are conducive to crowdfunding, and how pro-
jects should be crowdfunded. Innovation and technological advances
occur so quickly that new crowdfunding possibilities constantly arise
(Goldsby et al., 2018; Shaeri and Katircioğlu, 2018; Tacer et al., 2018).
These new possibilities answer some of the questions posed earlier,
while raising new questions that must be carefully analyzed. The scope
and the legal, economic, and social implications of these new possibi-
lities are still unknown, so they require deep reflection. However, this
reflection is difficult because of the sheer pace of change occurring at
all levels. A good example is the focus of this study, namely ICOs as a
new form of finance in digital environments.
An ICO is a fundraising mechanism used by innovative ventures.
Through ICOs, new projects are securitized by issuing tokens in ex-
change for cryptocurrencies, although some operations can also support
investment through fiat money. The main objective of ICOs is the fi-
nancing of projects linked to the Internet ecosystem through crowd-
funding campaigns. ICOs and their incipient market have become a key
mechanism to generate value in business models developed using
blockchain technology. Accordingly, this mechanism requires an un-
derstanding of certain technical and technological issues because it
works through smart contracts, blockchain technology, and, in some
cases, a decentralized autonomous organization (DAO). Blockchain,
which was introduced by Nakamoto (2008), is based on peer-to-peer
technology. It refers to a network or decentralized database based on a
cryptographic architecture where all the information is grouped into
blocks and where all users are connected to each other. Previous re-
search highlights the characteristics and properties of Blockchain, its
multiple applications, and the reasons for its massive global implica-
tions (Porras-González et al., 2019). Blockchain has primarily re-
volutionized the financial and money sector, but it has had an impact
on other sectors such as supply chain re-engineering (Chang et al.,
2019) and urban field (Marsal-Llacuna, 2018). The transformation from
the industrial to the information society, which is based on concepts
such as the sharing-economy, is made possible because ICTs (and
blockchain) set the conditions for sharing to become effective as an
economic activity (Benkler, 2004), even changing the way we produce,
record, and update a project's value (Pazaitis et al., 2017). Smart con-
tracts are digital contracts written in a programming language. The
execution of and compliance with these contracts occurs automatically,
without the intervention of a third party. The unique characteristics of
R.-S. Domingo, et al.
smart contracts and blockchains improve the potential for the syn-
chronization and automation of business processes, which can lead to a
more visible and less-intermediated working model (Chang et al.,
2019). A DAO is a peer-to-peer platform where the rules that govern a
decentralized organization in relation to a specific project are config-
ured and automated using smart contracts. The goal of all this tech-
nology is to create a decentralized environment where no third parties
are in control of the transactions that take place and where platforms
can carry out these transactions in a highly secure, cheap, fast, and
virtually error free manner. The central elements of ICOs are tokens.
From a theoretical point of view, there are several categories of tokens.
Currency tokens function as means of payment for goods or services
outside the platform. Utility tokens provide token holders with access to
a function or product that is supplied or created by the token issuer.
Investment tokens are assets that guarantee investors’ positive future
crypto cash flows. And finally, hybrid tokens are tokens that combine
characteristics of the other categories of tokens (Hacker and Thomale,
2018).
ICOs and crowdfunding share several features. For example, both
have low contributor protection, limited available information, no su-
pervision by public authorities, and no relevant history of proponents
or the intrinsic motivations driving proponents’ intentions
(Giudici et al., 2018). However, they also have major differences.
Whereas crowdfunding platforms handle flows of fiat money through
traditional payment channels, ICOs offer tokens through crypto-
currency blockchains. Other relevant differences relate to project
quality, project production, human capital, and the influence of social
media activity (Ante et al., 2018). Exploring this last point is one of the
main goals of this study.
Scholars have tried to identify how ICOs benefit entrepreneurs. ICOs
work better than traditional venture capital for projects with uncertain
payoffs or a right-skewed payoff distribution, a high proportion of
idiosyncratic risk, low information asymmetry, and a high risk of failure
(Chod and Lyandres, 2018). Blockchain technology can reduce costs of
capital by bypassing intermediaries and payment agents. ICOs can en-
courage open-source project development and decentralized business,
generating a network of customer-base integrated (Giudici and Rossi-
Lamastra, 2018). Through a network effect, the ICO structure can help
coordinate the use of the platform by providing information about its
quality to less-informed latecomers (Li and Mann, 2018). ICOs also help
reveal consumer demand, which generates competition between
buyers, providing promoters with higher returns than those offered by
traditional equity financing (Catalini and Gans, 2019). However, ICOs
also pose several potential challenges in the long run. The first is the
risk of depreciation of the token's price. Cryptocurrencies share this risk
with regulated investments, although the volatility of cryptocurrencies
is much higher. Second, tokens do not always confer voting power to
investors. Initially, ICOs can promote project growth by providing
flexibility and agility. However, it is unclear how the lack of influence
or corporate governance affects the future value and success of the
project. Third, the sensitivity of virtual currency projects to regulations
can lead to the depreciation of tokens or even bankruptcy. Fourth,
network effects and decentralized organizations can generate sys-
tematic risks such as the current gravitation toward certain crypto-
currencies to design tokens. Fifth, despite the widely accepted im-
pression that blockchain technology enables secure transactions;
hackers have been able to exploit flaws in the system or ancillary ser-
vices linked to blockchains. Nevertheless, over time, the cumulative
benefits of blockchain operations outweigh the cumulative costs related
to cyber-security, even for medium-term forecast horizons (Hughes
et al., 2017). Although the benefits and risks of ICOs are well docu-
mented today, the nature of ICOs is still unknown. Innovation and
technological advances move so quickly that new ICO-related possibi-
lities constantly arise, leading promoters, investors, and researchers to
consider an increasing number of new issues. Table 1 lists the potential
advantages and disadvantages of ICOs, as well as the unanswered
3
Technological Forecasting & Social Change 153 (2020) 119915
questions that arise from the analysis.
In light of the exponential growth of ICOs in recent years, coupled
with problems related to security and investor protection, concern and
reaction by regulators have rapidly increased. Token transactions are
the manifestation of financial globalization and decentralized govern-
ance mechanisms. Blockchain technology extends business and colla-
boration opportunities to investors in countries that do not receive
support from a strong funding scenario. However, blockchain tech-
nology makes the application of investor protection law or the pre-
vention of fraud more complicated. As commented above, there is a
reputation-related risk associated with the information asymmetry be-
tween promoters and investors. For this reason, successful ICOs should
inform the market about how they seek to compensate for information
asymmetry. This process should be understood as an iterated prisoner's
dilemma. A collaborative strategy based on voluntary disclosure of in-
formation can have better results, producing collaboration and an
equilibrium outcome (Piñeiro et al., 2016b). According to signaling
theory, high-quality projects should send buyers signals about the
quality of these projects to attract greater funding (Connelly et al.,
2011). These signals are observable and costly to realize and imitate.
Social networks can provide an optimal tool for promoters and in-
vestors to send signals to the market about the characteristics, quality,
and potential capacity of ICOs to generate returns.
The disparity in ICO regulations across countries and continents is
vast. Although there is no international convention for crypto secu-
rities, each geographical area is trying to adapt existing regulations to
these new crypto operations. These vital regulations must be applicable
both nationally and internationally. Future regulations will depend
heavily on whether ICOs become a primary vehicle for early-stage fi-
nancing or whether this trend subsides (Fisch, 2019). One of the most
notable advances, proposed by the US Securities and Exchange Com-
mission (SEC), is to move from ICOs to security token offerings (STOs).
STOs are similar to ICOs but with certain regulations that hold token
issuers accountable for their actions. For example, equity STOs trade on
exchanges with blockchain facilities located in jurisdictions that permit
their existence and trading (Pazos, 2019). All kinds of regulatory pro-
cesses can influence the chances of ICO survival. Regulatory processes
might influence the possibilities of ICO survival, leading to increasing
competitive pressure, which might in turn lead ICOs that have guessed
wrong to be selected out of the market.
The issues discussed herein and the increasing relevance of ICOs as a
means of finance have made ICOs and their effects on business activity
prominent new research topics. Several aspects that characterize ICOs
must be studied in depth. For example, the presale of tokens is standard
practice in many ICOs. Presales are preliminary offers to certain in-
vestors who act as anchor investors. Presales have replaced time-based
bonus systems to incentivize investors to invest early. The price of to-
kens in the presale phase is determined by the ICO itself. When tokens
are marketed in alternative digital markets, the price depends on the
supply and demand in these markets. What is unclear is how, if at all,
presale initiatives influence ICO success. Although several authors have
been unable to confirm this relationship (Ante et al., 2018), other au-
thors have argued that presale initiatives appear to be significantly
positively related to ICO success (Adhami et al., 2018). Some authors
have even argued that ICO presale periods negatively affect ICO returns
(Benedetti and Kostovetsky, 2018), suggesting that ICOs with presales
are successful because they are likely to sell all their tokens, but their
returns are lower because the price during presale is adjusted to the true
value of the token to avoid speculation. Considering the mixed results
reported in the literature, we propose the following hypothesis:
H1. Having a presale period influences an ICO's returns.
The benefit for users of acquiring tokens depends on the ICO design
and the nature of the token, which depends on promoters’ intentions. In
some cases, the acquisition of tokens is justified by the user's interest in
accessing the blockchain network created by a new project. In other
R.-S. Domingo, et al. Technological Forecasting & Social Change 153 (2020) 119915

Table 1
ICO´s characteristics.
Source: Compiled by the authors.
Advantages Disadvantages Unanswered questions

Blockchain technology provides access to capital and can reduce
the cost of raising capital by bypassing intermediaries and
payment agents
ICOs can encourage open-source project development and
decentralized business generating a network of customer-base
integrated
Blockchain technology enables secure transactions
Through a network effect, the ICO structure can help coordinate
the use of the platform by providing information about its
quality to less-informed latecomers
The ICO market liquidity hypothesis
The risk of depreciation of the token price does not differ from that
of other regulated investments, although volatility of
cryptocurrencies is higher
ICOs make good financial sense for projects with uncertain payoffs
or a right-skewed payoff distribution, a high proportion of
idiosyncratic risk, low information asymmetry, and a high risk
of failure
ICOs reveal consumer demand, which generates competition
between buyers, leading to higher returns for promoters than
those offered by traditional equity financing
ICOs can test marketability, which promotes the growth of a
project, providing flexibility and agility
Risks inherent to ICOs (e.g., low contributor protection,
limited available information, no supervision by public
authorities, and no relevant track record for proponents or
the intrinsic motivations driving proponents’ intentions)
can increase the cost of capital
Connections between customer networks and networks of
promoters must be carefully analyzed
Hackers pose a major risk to ICOs
Systematic risks may arise from network effects and
decentralized organizations
ICOs may have liquidity risk. The underpricing of an ICO
and its relation to market liquidity should be considered
The sensitivity of virtual currencies to regulations can lead
to the depreciation of tokens and even bankruptcy
Project risks might be transferred to investors, who might
witness some of their rights being ignored
Promoters can use certain practices to increase the value of
the virtual currency and generate market liquidity. ICOs
will fail if promoters cannot commit to a future token sale
schedule and only accept tokens for accessing the platform
The lack of influence on corporate governance can affect
the future value and success of the project
How would the creation of an organized
marketplace affect these risks and the cost of
capital?
How can differences in the intentions or
interests of investors and promoters be avoided
in an unregulated market?
How can the security of blockchain technology
be improved to enhance investor protection?
How might information standardization
(voluntarily or mandatory) influence
(positively or negatively) the network effect?
How would a regulated marketplace affect ICO
liquidity and what would its relation to
underpricing practices be?
What is the optimal regulation level to enable
the proper development of the cryptocurrency
market?
What are the options for an organization/
project to reduce risk for investors?
Could ICOs create a speculative bubble
resulting in fraudulent or illegal processes?
Could ICOs’ uncertainty be isolated from
tokens’ uncertainty?

cases, tokens can be used as internal currency in their own market-
places. On occasions, tokens are accompanied by other types of rights
for investors, such us the right to vote in future corporate decisions or
the rights granted by a dividend-bearing share. One interesting me-
chanism is when tokens enable users to contribute to the project's de-
velopment by initiating an ICO. Lastly, if the project relies on its own
blockchain, tokens can serve as a cryptocurrency and store of value
(Bitcoin or Ethereum; Adhami et al., 2018). Further research on the
relationship between the business model underlying ICOs and ICO re-
turns is needed. We argue that ICOs whose associated business models
are financial and use currency tokens do not yield different returns from
other ICOs associated with other business models. We propose the
following hypothesis:
H2. The category of an ICO does not determine its potential returns.
Several authors have argued that Bitcoin fails to satisfy the functions
of money (i.e., a medium of exchange, unit of account, and store of
value). These authors conclude that Bitcoin is not a real currency but
rather a speculative asset that is used primarily for speculative invest-
ment instead of an alternative currency or medium of exchange
(Baur et al., 2018; Yermack, 2015). There is considerable evidence of
price clustering in Bitcoin that shows that the attention received by
Bitcoin is influenced by both the volatility and volume on the previous
day (Urquhart, 2018). In contrast, a Bitcoin futures contract represents
an agreement to buy or sell Bitcoin at a given time in the future.
Trading in Bitcoin started on the Chicago Mercantile Exchange and the
Chicago Board Options Exchange in December 2017. The Bitcoin price
discovery process shows that Bitcoin spot and Bitcoin futures prices do
not react simultaneously to market news (Kapar and Olmo, 2019).
Corbet et al. (2018) analyzed whether the ability to trade Bitcoin fu-
tures has reduced the variance of Bitcoin prices or has facilitated hed-
ging strategies to mitigate pricing risk in the stock market. If so, it is
possible that Bitcoin acts more like a currency. These authors found that
volatility increased following the announcement of trading in Bitcoin
futures. Thus, hedge portfolios comprising futures cannot mitigate the
inherent risk in the spot market, leading to an increase in volatility. The
price discovery analysis indicates that price discovery is focused on the
spot market and on the idea that traders in the futures market are un-
informed noise traders. Many ICOs are token based and require the
exchange of cryptocurrencies such as Bitcoin for tokens. Hence, we
argue that Bitcoin returns and Bitcoin futures returns are indicators of
subsequent ICO returns. We propose the following hypothesis:
H3. Bitcoin spot returns and Bitcoin futures returns influence ICO
returns.
2.2. Sentiment extracted from social media
The goals of behavioral finance are to detect the mistakes that in-
vestors commonly make and then determine how to avoid them,
identifying the strategies that maximize market returns
(Subrahmanyam, 2008). According to behavioral finance, psycholo-
gical factors can affect investors’ decisions. One of these factors is
sentiment. Investor sentiment can be defined as the way investors form
beliefs (Barberis et al., 1998). Over the years, several ways to measure
investor sentiment have been developed. Many of these measurement
techniques emerged following the rise of the Internet and, more spe-
cifically, social media. Social networks let users express mood or sen-
timent through emoticons (Gilbert and Karahalios, 2010; Logunov and
Panchenko, 2011; Trkman and Trkman, 2018) or words (Oliveira et al.,
2013; Zhang et al., 2011, 2012). Advances in language analysis have
enabled researchers to use sentiment analysis software to extract sen-
timent from messages posted by social network users (Antweiler and
Frank, 2004; Bollen et al., 2011; Chekanskiy, 2012; Makrehchi et al.,
2013; Oh and Sheng, 2011; Piñeiro-Chousa et al., 2016a;
Sprenger et al., 2014; Tetlock, 2007). Although social network activity
may not fully explain investor sentiment, it can be considered a good
proxy. In fact, some authors have extracted and analyzed the emotional
content of messages posted by users and have then examined the impact
of this sentiment on selected financial variables (Nisar and
Yeung, 2018; Rao and Srivastava, 2013). In contrast, others have con-
sidered firm-specific characteristics on social media as a proxy for firm

4
R.-S. Domingo, et al.
activity, popularity, and influence to investigate how this information
affects selected financial variables (Cole et al., 2015; Lundmark et al.,
2016). We adopted the first approach. Although it is difficult to extract
investor sentiment, this is the only approach that can provide insight
into the sentimental or emotional content of investors’ messages.
Several authors have shown that sentiment extracted from micro-
blogging messages can help predict stock market returns and move-
ments (Oh and Sheng, 2011; Rao and Srivastava, 2012; Ruiz et al.,
2012). In contrast, others have not found evidence of this relationship
(Logunov and Panchenko, 2011; Oliveira et al., 2013), perhaps because
of the sentiment extraction method used (most did not use sentiment
analysis software). Although the high technology context of ICOs would
suggest that social network sentiment influences their potential success,
regardless of how it is measured, scholars have considered social media
activity without considering the influence of investor sentiment on ICO
success. For instance, Jin et al. (2017) found that Twitter influences the
funds raised by early-stage startups. They observed a quadratic re-
lationship between the number of Tweets and the funds raised such
that, initially, more posts mean greater funding, whereas too many
posts negatively affect the outcome. Yang and Berger (2017) also found
a positive relationship between number of followers and the amount of
startup funding. Nevin et al. (2017) found that the number of social
media posts positively affects the funds raised through crowdfunding.
To date, no study has explored how investor sentiment extracted from
specialized social networks influences ICO returns. This major gap
should be addressed. We propose the following hypothesis:
H4. : Social network sentiment influences ICO returns.
3. Data, method, and proposed model
The panel data used in this study were collected manually. The data
provided daily information for 125 ICOs. The data covered daily Bitcoin
returns, variation in daily social network sentiment about Bitcoin, and
daily Bitcoin futures returns. Instrumental variables capturing the ICO
presale period and ICO category were also included in the data set. The
unbalanced panel data set consisted of 44,217 observations gathered
from 2 December 2017 to 31 December 2018. No universal database on
ICOs exists, so the data were gathered from various sources. ICO
characteristics were downloaded from Trackico, and ICO daily prices
were downloaded from Coinmarketcap. Only 125 of 4104 ICOs found in
Trackico appeared in Coinmarketcap, so these 125 ICOs provided our
study sample. Bitcoin data were also downloaded from Coinmarketcap.
Bitcoin futures data were downloaded from CBOE, and social network
data were downloaded from StockTwits.com using the Stanford
CoreNLP Natural Language Processing Toolkit (Manning et al., 2014).
Specifically, 552,439 messages about Bitcoin were downloaded from
the social network StockTwits through its API. Sentiment was evaluated
on a Likert scale. The lowest score was −2, indicating very negative
sentiment, and the highest score was 2, indicating very positive senti-
ment. The value 0 indicated neutral sentiment.
ICO returns were calculated as follows:
Rit = ln (Pit ) − ln (Pit − 1), (1)
where Pit is the closing price of the ICO i at time t.
Bitcoin returns were calculated as follows:
Rbt = ln (Pbt ) − ln (Pbt − 1), (2)
where Pbt is the closing price of Bitcoin at time t.
Bitcoin futures returns were calculated as follows:
Rfbt = ln (Pfbt ) − ln (Pfbt − 1), (3)
where Pfbt is the closing price of Bitcoin futures at time t.
Daily sentiment was calculated as the average sentiment of all
messages posted on a given day. The variation in daily sentiment was
calculated as follows:
5
Technological Forecasting & Social Change 153 (2020) 119915
sentt − sentt − 1
vsentt = ,
sentt − 1 (4)
where sentt is the daily sentiment at time t.
The analysis was based on dynamic panel data (DPD) methodology.
DPD methodology is suitable when endogeneity and unobserved het-
erogeneity must be controlled (Bastos and Pindado, 2013;
Pindado et al., 2014; Wang and Lee, 2018). A two-step system GMM
estimator was preferred to a difference GMM estimator because a
consistent estimate of the covariance matrix as the weight for the mo-
ment conditions (Windmeijer, 2005) was more efficient. The two-step
system GMM also enabled the incorporation of dynamics in the model
using the lagged dependent variable. Doing so was useful because it
might have been important to recover consistent estimates of other
parameters even if the coefficient of the lagged dependent variable was
not of direct interest (Bond, 2002). The Xtabond2 Stata module was
used for estimation (Roodman, 2015).
The proposed model can be defined as follows:
Rit = β0 + β1 Rit − 1 + β2 Rbt + β3 Rfbt + β4 vsentt + β5 pre + β6 cat + εit ,
where Rit denotes ICO returns, Rbt denotes Bitcoin returns, Rfbt denotes
Bitcoin futures returns, vsentt denotes Bitcoin sentiment, pre is a presale
dummy, cat is a category dummy, and qi are time dummies.
The independent variables in the model were lagged ICO returns
(Rit-1), Bitcoin returns (Rbt), Bitcoin futures returns (Rfbt), and Bitcoin
sentiment (vsentt). The lagged value was added to incorporate dynamics
in the model. In addition to the time dummy variables, two instru-
mental variables, pre and cat, were included. The dummy pre referred to
the existence (= 1) or absence (= 0) of an ICO presale period. The
dummy cat referred to the purpose of the ICO (“cryptocurrency” = 1 or
“other” = 0).
4. Results
Table 2 shows the descriptive statistics for the variables based on
the observations included in the analysis. The number of observations
for Bitcoin futures was lower than for other variables because they were
released on 10 December 2017. The mean ICO returns and Bitcoin re-
turns were slightly negative, which suggests that the study period was
bearish. However, the mean social network sentiment about Bitcoin
suggests that the period was positive, which could be explained by the
appearance of Bitcoin futures.
Table 3 shows the correlation matrix. There were no strong corre-
lations between the variables, indicating the absence of multi-
collinearity. All independent variables were correlated with the de-
pendent variable. These correlations were significant at the 5% level.
Table 4 shows the parameter estimation using the DPD metho-
dology. The relationship between ICO returns and lagged ICO returns
was negative, indicating that a decrease in ICO returns one day leads to
an increase in ICO returns the next day. This finding suggests that ICOs
are highly volatile and that they are highly speculative investments.
The presale and time dummies were significant. The presale dummy
had a negative coefficient, suggesting that ICOs with presale periods
have lower returns than ICOs without presale periods. This result
confirms H1. This finding is consistent with those reported by
Benedetti and Kostovetsky (2018), who observed that having a presale
period negatively affects ICO returns because the presale can help the
market fix the price based on the true value of the token. The ICO ca-
tegory seemed to be non-significant, which suggests that ICO returns do
not depend on the ICO's purpose (cryptocurrency vs. other). This result
confirms H2. Bitcoin spot returns and Bitcoin futures returns positively
influenced ICO returns. An increase in Bitcoin spot returns or Bitcoin
futures returns led to an increase in ICO returns. This result suggests
that even if an ICO is not based on Bitcoin, Bitcoin significantly influ-
ences its returns. Thus, it would seem that Bitcoin is highly relevant for
ICO investors. These results confirm H3. Finally, social network
R.-S. Domingo, et al. Technological Forecasting & Social Change 153 (2020) 119915

Table 2
Descriptive statistics.
Variable Obs. Mean SD Min. Max. Skewness Kurtosis

Rit 44,163 −0.004023 .099241 −2.10953 1.685691 .8242294 27.48994

L.Rit 44,109 −0.0037427 .0993278 −2.10953 1.685691 .8200743 27.42125
Rbt 44,217 −0.0028936 .0448366 −0.1845817 .225119 −0.006077 5.85726
vsentt 42,038 .0028259 .0744214 −0.1894746 .2356289 .1880637 3.12900
Rfbt 36,580 .0165277 .4573619 −0.2049787 9.799238 21.13314 452.06870

Rit = ICO returns; L.Rit = lagged ICO returns; Rbt = Bitcoin returns; vsentt = Bitcoin sentiment; Rfbt = Bitcoin futures returns; N = 44,217 for 125 ICOs over 395
days (December 2017 to December 2018).

Table 3 Table 4
Correlation matrix. GMM regression results.
Variable Rit L.Rit Rbt vsentt Rfbt ICO returns Coefficient Significance

Rit 1.000 L.Rit −0.0581997** (0.000)

L.Rit −0.0739** 1.000 Rbt 1.194871** (0.000)
Rbt .4779** −0.0090 1.000 vsentt .0420891** (0.000)
vsentt −0.0131** .0106** −0.0994** 1.000 Rfbt .0043918** (0.000)
Rfbt .0849** .0615** .1164** .1090** 1.000 pre −0.0014908** (0.000)
cat .0003462 (0.130)
Rit = ICO returns; L.Rit = lagged ICO returns; Rbt = Bitcoin returns; Wald test F(10, 125) = 5387.03**
vsentt = Bitcoin sentiment; Rfbt = Bitcoin futures returns; N = 44,217 for 125 AR1 z = −5.77**
ICOs over 395 days (December 2017 to December 2018); asterisks denote sig- AR2 z = 0.61
Sargan chi2(1158) = 8592.02**
nificance of the coefficient at *10% and **5%.
Hansen chi2(1158) = 123.22

sentiment about Bitcoin positively influenced ICO returns, suggesting
that ICO investors base their strategies on what is said about Bitcoin in
social networks. This result confirms H4.
The AR2 statistic was used to check for potential misspecification of
the model. This statistic tested for lack of second-order serial correla-
tion in the first-difference residuals. This hypothesis was rejected. There
was no lack of first-order serial correlation (AR1) in the first-difference
residuals due to the transformation. Sargan's and Hansen's tests re-
vealed no over-identification. The Wald test confirmed the joint sig-
nificance of the reported coefficients, including the dummy variables.
5. Conclusions
ICOs have the potential to change how new projects raise money,
providing more control to entrepreneurs, greater liquidity to investors,
and additional investment opportunities to early adopters. Regulatory
uncertainty surrounding ICOs has slowed their explosive growth. It is
unclear whether they will soon become a popular option for early-stage
financing or whether this trend will subside. The results imply that the
correlation between daily ICO returns and the lag of daily ICO returns is
negative, suggesting that ICOs are highly volatile and that they are
speculative, high-risk investments. In addition, certain variables that
could lead to ICO success seem not to have the same positive influence
on returns for investors. In some cases, a presale period seems to be
positively related to ICO success. However, this study shows that having
a presale period negatively affects ICO returns. Many ICOs initially
emerge to activate their own cryptocurrencies, which leads to the idea
of obtaining higher returns than those offered by other ICOs with a
different purpose. This study shows that being a cryptocurrency does
not seem necessary to influence an ICO's returns. This finding suggests
that only the strongest, most well-positioned cryptocurrencies can
survive (e.g., Bitcoin and Ethereum). The results also suggest that
Bitcoin is highly relevant to ICO investors. An increase in Bitcoin spot
returns or Bitcoin futures returns leads to an increase in ICO returns.
Finally, according to signaling theory, social networks are vital tools to
reduce information asymmetry between investors and ICO promoters.
The results show that investors pay attention to what is said about ICOs
in specialized social networks. Social network sentiment influences ICO
returns. This finding should be considered by promoters, who should
strive to send meaningful, transparent, timely information to the
GMM estimation results: Rit = ICO returns; L.Rit = lagged ICO returns;
Rbt = Bitcoin returns; vsentt = Bitcoin sentiment; Rfbt = Bitcoin futures re-
turns; pre = presale dummy; cat = category dummy; cons = constant; time
dummy variables were included in the regression to control temporary effects;
the Wald test measures the joint significance of the reported coefficients
asymptotically distributed as χ2 under the null of no relationship; ARi is a serial
correlation test of order i using residuals in first differences asymptotically
distributed as N(0,1) under the null of no serial correlation; Sargan's and
Hansen's tests (asymptotically distributed as χ2) evaluate over-identifying re-
strictions; asterisks denote significance of the coefficient at *10% and **5%.
market to increase ICO returns.
This study makes a major contribution to the literature on ICOs by
exploring the effects of key variables on ICO returns. Future studies
should examine other variables related to ICO success. Examples of
such variables are technical characteristics and voluntarily disclosed
information. Future studies should also consider different financial
variables and their relationship with other cryptocurrencies (Table 2).
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