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ICOs and the Information Cascade

As the value of bitcoin soars to an all-time high, initial coin offerings (ICO) are becoming more desirable for entrepreneurs and investors. For startups, ICOs provide an alternative route to obtain funding and given the popularity of cryptocurrencies, it’s not uncommon to see celebrities endorsing these ICOs.

Since ICOs are a form of crowdfunding, everyone from the wealthiest investor to the average citizen can contribute to funding the startup. Having the wide-reaching influence of celebrities and other social networks, it’s only inevitable that positive sentiments would spread leading towards the opportunity to obtain a return. This spreading of a potential investment return of an ICO is a prime example of an information cascade. In this information cascade, one person may see that their friend invested in an ICO—therefore they may do their own research to determine if the ICO is legitimate and something they’d want to invest in; this process will continue amongst friends until there are enough people for the subsequent friend to just follow the cascade without doing research. With celebrity endorsements, however, the information cascade begins much earlier and faster because a person will observe their friends that follow that celebrity and the celebrity’s other followers sharing the news on social media about investing in the ICO and immediately assume that the ICO must be legitimate and something worth investing in. 

In the New York Times article, the founders of Centra made claims that Visa was their supposed trusted partner; it did not take long for Visa to quickly deny having any relationship with Centra. However, with the help of celebrity endorsers including Floyd Mayweather, Centra was able to secure over $30 million dollars from investors (NYT).

In the age of social media, a consumer or investor must be even more vigilant when considering ICOs. Therefore, in the case of fraudulent startups endorsed by celebrities, the information cascade is wrong because even though someone may assume an ICO is legitimate because a lot of people are investing in it, the founders may have no intention of working to provide a return to their investors or may not be transparent about their operations.

 

Links

https://www.nytimes.com/2017/10/27/technology/how-floyd-mayweather-helped-two-young-guys-from-miami-get-rich.html

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