The cryptocurrency industry has experienced a rollercoaster ride since its inception in the post-2008 economy. From its humble beginnings as an untested software innovation, it quickly Agained attention and was touted as the future of investing by major celebrities in Super Bowl commercials. However, the industry also faced its fair share of challenges, with the infamous crypto winter of 2022, exacerbated by the downfall of FTX and its founder, Sam Bankman-Fried. These reputational crises have hindered mainstream adoption, evident in the declining Google searches for terms like Bitcoin and Ethereum.
Regulators have also taken a firm stance, exemplified by the SEC’s lawsuit against Coinbase and Binance, targeting the core decentralized business model of cryptocurrencies. The backlash against crypto stems from concerns about bad actors and the perceived complexity of the technology, leading to a lack of public trust. However, within the crypto community, there is a consensus that the key to determining the quality of cryptocurrencies lies in their developer engagement, which is surprisingly transparent.
Many cryptocurrencies utilize open-source platforms such as GitHub for their software development. Seasoned investors routinely delve into the publicly available development history of a cryptocurrency as part of their due diligence. A recent study published in the Journal of Management Information Systems by Mariia Petryk, an assistant professor of information systems at the Donald G. Costello College of Business at George Mason University, investigates the correlation between developer engagement and cryptocurrency quality. Petryk collaborated with Liangfei Qiu and Praveen Pathak from the University of Florida for this study.
Petryk explains that this research aims to evaluate reputation in a context where traditional reputation indicators are not precise. When choosing a doctor, for instance, one often relies on recommendations from trusted sources. In the absence of such endorsements, people look at a doctor’s history, education, and training. Similarly, crypto investors can assess quality based on the effort developers put into writing the code.
The researchers analyzed GitHub data for 559 cryptocurrencies between August 2016 and December 2019. They focused on five open-source activities: commits, pull requests, issues, forks, and watches. Commits represent code modifications submitted by developers, eventually becoming part of the cryptocurrency’s source code. Pull requests are proposed modifications awaiting evaluation before official adoption. Issues refer to questions, bugs, or problems discussed within the open-source platform. Forks denote mirrored copies of the original code, linked to a developer’s account. Watches allow developers to closely follow community discussions surrounding a cryptocurrency.
The study found that a one-standard-deviation increase in forks and watches correlated with a 0.56% monthly price increase, or 6.7% per year. In terms of quality enhancement, an increase in issues exerted upward pressure on token price, while pull requests and commits had the opposite effect. A one-standard-deviation increase in issues led to a 4.3% higher price over one year, while an equivalent increase in pull requests resulted in annual losses of 5%. These contradictory results highlight the uncertainty surrounding the evaluation and implementation of proposed changes. More requests for revision may prolong the evaluation process, impacting cryptocurrency quality.
Overall, the findings suggest a virtuous circle wherein more promising cryptocurrencies attract greater developer attention, leading to quality improvements reflected in token prices. While the expansion of the developer community may introduce more pull requests and commits that lower token prices, the positive impact of forks and watches is approximately six times stronger.
These results imply that the intensity of developer attention and engagement could serve as a leading indicator of how the market values tokens. However, it’s essential to note that statistical patterns do not guarantee specific investment decisions. Nevertheless, this information from platforms like GitHub could be valuable for policymakers developing nuanced regulatory approaches. Petryk emphasizes that one purpose of regulation is to create equal opportunities, and transparent mechanisms like open-source platforms enable investors to learn about underlying assets and make informed judgments. By utilizing this information, regulators can ensure information disclosure, creating a level playing field for investors.
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1. Source: Coherent Market Insights, Public sources, Desk research
2. We have leveraged AI tools to mine information and compile it
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