Initial Coin Offerings and the Value of Crypto Tokens

This paper explores how entrepreneurs can use initial coin offerings -- whereby they issue crypto tokens and commit to accept only those tokens as payment for their products -- to fund venture start-up costs. We show that the ICO mechanism allows entrepreneurs to generate buyer competition for the token, giving it value. We find that venture returns are independent of any committed growth in the supply of tokens over time, but that initial funds raised are maximized by setting that growth to zero to encourage saving by early participants. Nonetheless, since token value depends on a single period of demand, their ability to raise funds is more limited than traditional equity finance. A lack of commitment in monetary policy does, however, undermine saving, and therefore the cost of using tokens to fund start-up costs is inflexibility in future capital raises. Crypto tokens can also facilitate coordination among stakeholders within digital ecosystems when network effects are present