Celebrity Endorsements & Crypto Scams: How Investors Should Proceed with Caution

Mysterious crypto scene, celebrity endorsers amidst a dark web, chiaroscuro lighting, intensified expressions, uneasy mood, fraudulent elements lurking, contrast of glamour, awareness, vital research and due diligence, intricate blockchain patterns, cautionary ambiance.

New research has revealed a link between celebrity endorsement of crypto projects and the likelihood of the projects being scams. The research, titled “The Effect of Celebrity Endorsements on Crypto,” was conducted by two former SEC economists—Joshua T. White and Sean Wilkoff. They discovered a significant increase in scams connected to celebrity-endorsed ICOs up until 2019 and fraudulent ICOs through April 2023.

This research raises a red flag for investors, as celebrities might not always have the necessary expertise to identify credible projects or manage legal risks without disclosing compensation. The study examined the behavior of 21 celebrities, including Floyd Mayweather, Snoop Dogg, Paris Hilton, and Lionel Messi between 2016 and 2018.

Interestingly, celebrity endorsements were more likely to be scams when the celebrity’s profession did not match the ICO product, according to the researchers’ sample. However, when a celebrity’s profession matched the ICO product, such as a soccer player endorsing a blockchain-based sports gambling website, it was less likely to be a scam. This suggests that when celebrities understand the use case of the token, they seem to conduct more due diligence and have a better understanding of the product they are endorsing.

The research also highlighted the need for both investors and celebrities to better comprehend the risks that come with cryptocurrencies and to conduct due diligence before endorsing a digital asset. According to White, if a token’s creator resorts to celebrity promotion, it could be an indicator of subpar quality, possibly an attempt to divert attention from it using celebrity glamor.

Focusing solely on ICOs, the research found that celebrity endorsements increased the amount of money raised and the likelihood of the token being added to an exchange. Although not all endorsed ICOs are scams, and not all scams are celebrity-endorsed, the involvement of celebrities was linked to a 53% increase in capital raised at the ICO, which equated to roughly $9 million more for token issuers.

Celebrity-endorsed tokens were also 37% less likely to have a pre-sale. Instead, many projects replaced a pre-sale with celebrity endorsement, which meant investors lost key information and the quality price signals that pre-sales generate. This emphasizes the importance not just of celebrities, but also of investors, to conduct due diligence and research any cryptocurrency-related digital asset or exchange before making any investment decisions.

Source: Decrypt

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