Cryptos Left on the Table? Underpricing in Initial Exchange Offerings

Abstract: This study empirically examines underpricing in the newest phenomenon of cryptocurrency fundraising: initial exchange offerings (IEO). Drawing from the well-supplied initial public offering (IPO) literature, we study the existence and level of underpricing in IEOs and whether theories on asymmetric information and behavior can help explain it. In a dataset of 186 manually collected IEOs conducted between January 2019 and April 2021, we find an average underpricing of 412.02 percent and a median of 90.49 percent. Regression results show that some attempts at mitigating information asymmetry might decrease underpricing, such as having a pre-sale prior to the IEO, having a longer whitepaper, and a larger issue size. Conversely, conducting an IEO on a trusted and reputable cryptocurrency exchange and during high cryptocurrency market sentiment is positively correlated with underpricing. We suggest that IEOs are subject to severe underpricing and that theories from IPO literature can provide explanations to help understand underpricing in an IEO context.