A Fractal View on Losses Attributable to Scams in the Market for Initial Coin Offerings

Analogous to traditional Initial Public Offerings (IPO), Initial Coin Offerings (ICOs) represent an emerging channel through which firms can access external funding using the new evolving digital financial market for tokens. However, while ICOs represent an alternative funding channel for startups, the ICO market is essentially unregulated, which creates opportunities for fraud such as ‘ICO scams’. This paper addresses the question as to what the expected losses attributable to scams in the market for ICOs are. Using web scrapping techniques, all ICOs launched between August 2014 and December 2019 were first screened for accusations of fraud, before a novel methodological framework was employed to understand the true costs associated with scams. The findings reveal that 56.80% of ICOs were subject to scams, corresponding to 65.80% of the relevant market capitalization, estimated at USD 15.38 billion. Moreover, it is found that the loss distribution due to scam ICOs is governed by a fractal process. Specifically, the power law exponent for the distribution governing losses due to scam ICOs suggests that the second moment is not defined, rendering the sample mean unstable. Taken together, the results in this paper provide evidence that we have not yet seen the largest loss in the market for ICOs and are supportive of an urgent need for ICO market regulations from governments and regulatory agencies.