Trust, but verify: The economics of scams in initial coin offerings

Abstract

Losses from frauds and financial scams are estimated to exceed U.S. $5 trillion annually. To study the economics of financial scams, we investigate the market for initial coin offerings (ICOs) using point-in-time data snapshots of 5,935 ICOs. Our evidence indicates that ICO issuers strategically screen for naive investors by misrepresenting the characteristics of the offering across listing websites. Misrepresented ICOs have significantly higher ICO scam risk, are unlikely to reflect unintentional mistakes, and attract funds from less sophisticated investors. We estimate that 40% of ICOs (U.S. $12 billion) in our sample are likely to be scams. Overall, our findings uncover how screening strategies are used in financial scams and reinforce the importance of conducting due diligence.