What Do Institutional Investors Bring to Initial Coin Offerings(ICOs)?

Abstract

[Blockchain technology has attracted global attention due to its capabilities in protecting data security and traceability. This has driven the development of practical applications in various fields, particularly in management science, transport and logistics, and supply chain management. Initial coin offerings (ICOs), an emerging start-up fundraising method developed with blockchain technology, are now popular among start-ups that issue initial tokens as the sole exchange medium for their planned products. In addition to the general ICO, the pre-ICO stage is an important phase of many ICO projects. This paper establishes an ICO model with network effects, a common phenomenon in ICOs, to study the effect of institutional investors' participation in the pre-ICO stage of offerings made by cash-strapped entrepreneurs. We find that introducing institutional investors helps mitigate the financing pressure and maintain the total amount of tokens in circulation at a relatively stable level when the initial investment is relatively high. Meanwhile, introducing institutional investors significantly increases the equilibrium price of tokens during the public offering stage and increases the price fluctuation of tokens over time. In addition, we find that the entrepreneur will over-issue tokens when the intensity of network externality is relatively high. Furthermore, we investigate the effect of the entrepreneur's private quality information over the consumers. We find that an entrepreneur that expects high product quality in the future may give up public offering because signaling quality by introducing institutional investors may be inefficient.]