Exuberance by design? Hyping cryptocurrencies markets through token underpricing

We investigate potential factors influencing token after-market returns to explain the extreme levels of underpricing experienced in the cryptocurrencies market. This research analyses a sample of 300 tokens issued between September 2015 and May 2018, fully capturing the window of maximum ICO activity. The results confirm the presence of significant underpricing with an average of 180.66% and a median of 32.21%, which far exceed that of the IPO market. The cumulative after-market mean returns at three months, six months, nine months, and twelve months continue to be remarkably high and above 100%. However, the return distributions exhibit substantial negative median values, highlighting the poor post-ICO performance of most tokens. The research also confirms the IPO ‘fads hypothesis’ as a reasonable explanation of token underpricing, which attributes positive initial returns to investor overreactions. This hypothesis provides a rationale for ICO higher underpricing with respect to the IPO market as well. Finally, the quality of the management team positively affects token after-market returns while the project technical validity does not significantly impact on them. Blockchain entrepreneurs may use these results to design tokens and the offering campaigns with the aim of reducing negative swings in the after-market.