Abstract

Initial Coin Offering (ICO) is a new form of financing instrument for start-up firms. The firm issues tokens (or coins) in the ICO phase to raise capital to build capacity for its project. If the project is successful, the firm will provide product in subsequent periods and this product can only be accessed via tokens which can be traded over an exchange market. In this paper, we propose a model to study the firm’s optimal ICO strategy and the equilibrium token price dynamics when there is a multi-period trading market for tokens. We find that the ICO will be successful if and only if the capacity-cost-to-customer-valuation ratio is low. There may also exist multiple equivalent ICO decisions that yield the same revenue for the firm. We also compared the ICO mechanism with the traditional bank-financing mechanism. We find that when the capacity cost is low, the ICO mechanism is better than the bank-financing mechanism. We also explore the impact of the speculator’s risk attitude on the firm’s profitability. In general, the firm will be better-off when the speculator (those who participates in the ICO and trades tokens) is more risk-seeking.

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