The Application of Behavioural Heuristicsto Initial Coin Offerings Valuation and Investment

Abstract

Blockchain projects have seen a rush of investment in the form of Initial Coin Offerings (ICOs) in 2016 and 2017, yet little is understood about how to valuate these projects. This research explored the application of behavioural heuristics to ICO valuation and investing. Identified were six variables that may impact investment decision making due to key behavioural biases. These variables - coin value, market capitalisation, ease of understanding, market sentiment, maximum ICO bonus level, and pre ICO social media levels - were analysed using Pearson’s Correlation against return on investment (ROI). The data was collected from numerous ICO websites and Twitter. Fundamental analysis was taken from Coincheckup due to it being a major source of information for many retail investors and using a well-defined methodology. Sentiment data was collected from Twitter and assessed using Crimson Hexagon’s social sentiment analysis tool. Ease of understanding was evaluated using AWS Blockchain business canvas. All information was compiled into a single dataset and the top 47 projects in terms of ROI were utilised for this research. Ease of understanding was found to be significantly correlated with ROI. Ease of understanding was then combined with fundamental analysis to develop a hybrid model of evaluation for cryptocurrency projects. This model substantially outperformed fundamental analysis alone, with a 33.6% improvement on ROI. In conclusion, current methods of fundamental analysis for blockchain projects are an inadequate method for capturing their full potential future value. Investors lacking appropriate tools and with limited knowledge and experience - along with the relatively recent advent of cryptocurrencies - are being influenced by behavioural factors such as ease of understanding. It is therefore important that investors and entrepreneurs alike take such factors into consideration.