new research PhDs from the University of Nevada, Reno College of Business, and Vanderbilt University are investigating how celebrity endorsements affect the success of initial coin offerings (ICOs). Similar to a stock initial public offering (IPO), an ICO raises funds to develop a platform, business, etc. 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 studied the role of media coverage in the non-fungible token (NFT) market. We then decided to explore the role of celebrity endorsements in the ICO market. Researchers wondered whether endorsements act as an alternative to other events that drive demand for cryptocurrencies, such as presales, whether celebrity endorsements increase total funding, and whether celebrity endorsements increase total funding. I wanted to find out if the ICO was likely a scam.
“The media is considered to be reputable, and our research found that media coverage of NFTs gives investors more knowledge about the NFT market,” Wilkoff said. “Celebrity endorsements are a different story because celebrities are not defined solely by their ability to provide reliable financial advice.”
The study surveyed 21 celebrities who endorsed ICOs between 2016 and 2018 and have over one million online followers on at least one platform. Celebrities targeted included actors, athletes, businessmen, reality TV stars and royalty.
Findings show that celebrity endorsements serve as an effective alternative to other demand-driving events such as presales, but without presales, investors are more concerned about the viability of the token, its platform, and the token itself. It was shown to lose information such as price signals about management team. Celebrity endorsements are more likely to be added to exchanges as his ICO will raise more money and possibly additional funding. However, these effects do not translate into long-term success. The researchers also found that celebrity endorsements are likely to be fraudulent, especially if the celebrity’s expertise (such as a boxer) doesn’t match the expertise of the platform being built (such as a streaming video service). These findings are not generalizable to all investments and are applicable only to ICOs.
“Endorsements don’t always indicate quality, and there’s a link between celebrity endorsements and investing being a fraud,” Wilkoff said. “However, it is important to remember that not all approved ICOs are scams, nor are all scams endorsed by celebrities.”
Recently, a number of celebrities, including Shaquille O’Neal, were involved in a lawsuit against Futures Exchange (FTX) for supporting the bankrupt cryptocurrency exchange after allegations of illegal activities became public.
“Taylor Swift was offered a deal to endorse FTX, but after doing some research, she turned it down,” Wilkoff said. “Public figures should conduct due diligence and research before endorsing crypto-related digital assets and exchanges, and investors should not blindly rely on celebrity endorsements.”
