New research from the University of Nevada, Reno College of Business and Vanderbilt University explores how celebrity endorsement affects an initial coin offering’s (ICO) success. Similar to initial public offerings (IPO) in stock, ICOs raise funds to develop things like a platform or business by issuing a new cryptocurrency before it is traded on an exchange.
Dr. Sean Wilkoff, assistant professor of finance at the University of Nevada, Reno, and Dr. Joshua T. White, assistant professor of finance at Vanderbilt University, previously researched the role of media coverage in the non-fungible tokens (NFTs) market and decided to explore the role of celebrity endorsements in the ICO market. The researchers wanted to find if endorsement works as a substitute for other demand-driving events for cryptocurrencies, such as a presale, if celebrity endorsement increases the overall amount of funds raised and if ICOs with celebrity endorsements had a higher likelihood of being scams.
“The media is seen as reputable, and our research found that media reporting on NFTs educated investors about the NFT market,” Wilkoff said. “With celebrity endorsement, it’s a different story because celebrities are not defined solely by their ability to provide reputable financial advice.”
The research examined 21 celebrities with an online following of 1 million or more people on at least one platform who endorsed an ICO between 2016 and 2018. Celebrities looked at were actors, athletes, a businessman, reality television stars, and a member of royalty.
Research findings indicated that celebrity endorsements can serve as an effective substitute for other demand-driving events, like a pre-sale, but that without a pre-sale, investors lose information such as price signals about the viability of the token, its platform and management team. Celebrity endorsements raise more money at the ICO and have a higher likelihood of being added to an exchange, likely due to the additional capital raised. However, these effects do not translate into long-term success. Researchers also found that celebrity endorsements are more likely to be a scam, especially when the celebrity’s expertise (e.g., a boxer) does not match that of the platform being built (e.g., a streaming video service). These findings are not generalizable to all investments, just ICOs.
“An endorsement is not always a signal of quality, and there is a link between celebrity endorsement and the investment being a scam,” Wilkoff said. “However, it is important to remember that not all endorsed ICOs are scams and not all scams are celebrity-endorsed.”
Recently, many celebrities such as Shaquille O’Neal were implicated in the lawsuit against Futures Exchange (FTX), for endorsing the cryptocurrency exchange, which collapsed as allegations of illegal activity were made public.
“Taylor Swift was offered a deal to endorse FTX but declined after doing her research on it,” Wilkoff said. “Celebrities should conduct due diligence and research any cryptocurrency-related digital asset or exchange before endorsing it and investors should not just blindly trust a celebrity endorsement.”