2018 has been a bumper year for Initial Coin Offerings despite the sell-off in cryptocurrencies. But potential investors have struggled to separate the opportunities from the scams. More and more evidence of corruption and paid reviews leaves people deciding they don’t trust ICO listing services.
We’ve looked into the issue and will help you avoid the seamier side of ICO research.
ICO Bench – Too Tarnished to Trust?
The most important first step for any investor is research. Whether in the fiat world or in the crypto world, you have to understand who you’re investing in. ICO listing services promise to make things easier by consolidating information in one place, screening ICO projects for potential issues and providing easy-to-understand metrics. At the same time, ICO listing services help ICO projects spread the word about their offering.
One of the largest of these services is ICO Bench. Since 2017, the company has listed more than 4000 ICOs projects.
New projects can list their ICOs free of charge by filling out a simple application. The form asks for links to the project’s whitepaper and social media accounts as well as KYC requirements and regional restrictions.
ICO Bench’s in-house algorithms and a network of 347 Experts analyze the listings and rate the projects.
No free lunches
The initial causes of concern come from the way ICO Bench says it makes money. ICO projects can pay to have their applications reviewed first. They can pay for prominent placement on the website, they can pay for inclusion in ICO Bench’s newsletter and they can pay for a cross-listing on HitBTC. ICO projects can also pay for a “full analytical review”.
ICO Bench clearly states in its FAQ that none of the paid packages will alter the ratings that ICO projects receive.
Pay-for-placement has a long history that goes back to the beginning of brick-and-mortar retail. If your favorite cereal happens to be stocked at eye-level on the grocery shelf, you can believe that money changed hands. Online, it’s no different. Take eBay’s Promoted Listings program, for example, sellers can get their listings placed in more prominent positions.
That does not mean, however, that pay-for-placement never crosses the line to become pay-for-play. The Better Business Bureau, for example, makes its money from the fees businesses pay for listings on the BBB website. In 2010, the ABC News show 20/20 found that the BBB’s Southern California chapter gave paying members A+ reviews and slapped F grades on companies that wouldn’t pay. 20/20 reporters even paid the BBB $425 to get an A- grade for Hamas.
Accusations against ICO Bench
The number of ICOs exploded in 2017 and even more money has been raised in the ICO market in 2018. But ICO Bench’s reputation hasn’t weathered the storm. Long-standing suspicions that ICO Bench favored its paying customers solidified as new evidence began to emerge.
Buying Expert status
In a series of posts starting in late May, marketing consultant and life extension advocate Filip Poutintsev documented several areas of concern about ICO Bench. Ineffective ad placement, unresponsive customer support and false ratings by the ICO Bench algorithm and its Experts were just some of the criticisms Poutintsev lodged against the listing service. The post could easily be dismissed as yet another crypto rant since Poutintsev did not cite any sources or provide any evidence to back up his claim.
A month later, however, Poutintsev followed up with a screenshot of an email ICO Bench ostensibly sent to one of his followers. The email explained that the way to become an Expert is to pay ICO Bench 2 bitcoins.
Why would someone pay more than $12,000 to become an ICO Bench Expert? Poutintsev claims that Experts can sell their rating power on the open market for as little as $500 per 5-star review.
Finally, at the end of June, Poutintsev explored ICO Bench’s opaque management. A red flag when dealing with any crypto company is the lack of information about the company’s founders and executives. Presumably, that negatively affects ratings on ICO Bench, but the company itself doesn’t provide any information about its own executives. Poutintsev knits together a few facts and assumptions to identify two Russian ICO advisors, Nikolay Shkilev and Vladimir Nikitin, as ICO Bench’s founders.
Markus Hautmann posted his own criticism of ICO Bench and its Experts. Hautmann is the co-founder of Alethana, which plans to build its ICO listing service on an Ethereum-based distributed app. Since the company was going through its own ICO, Hautmann decided to see what it would take to rig things in Alethana’s favor.
“Shortly after we registered with ICObench,” Hautmann wrote, “a certain Vagiz wrote to us via Telegram and offered to get us positive ratings in exchange for payment.”
Hautmann posted screenshots of the exchange with “Vagiz” who sold Hautmann 2 ratings for $800 and then offered a bulk discount of $1,800 for another 6 ratings.
Another Expert, “John Smith”, offered to sell his rating of Alethana and was even willing to paste text Alethana provided into the review. The sentences that appeared in the review started with the letters S, C, A and M.
Do they do due diligence?
ICO research firm Cointelligence published its own critique of ICO Bench’s rating system. The firm found several red-flag issues while researching the Cremit ICO, and reached out to one of the project’s advisors, an ICO Bench Expert, to find out more about Cremit’s CTO. The Expert replied that he was not a “core member” so did not know anything about the CTO.
Cointelligence also found that ICO Bench’s algorithmic rating system had given Cremit a 4.1 rating (out of 5) despite obvious flaws like plagiarism in the white paper. Other listing services were no better. ICOMarks awarded Cremit with an 8.0 out of 10, Track ICO a 4.4 out of 5, and Coinfollow an 8.3 out of 10.
In another example, Cointelligence found that ICO Bench had given the Veio ICO a 3.5 rating despite the fact that the project used stock photography for its executive profiles.
DYOR: Do Your Own Research
Ultimately any investment decision you make is your responsibility. If you blindly rely on the ratings ICO listing services provide, there’s a good chance you’ll get burned. The only way to ensure you make an informed decision is to do the research yourself.
ICOs are not IPOs
If you are new to the crypto game, then you need to understand that the difference between an ICO and an IPO is more than just a letter. A company in the fiat world can only issue an IPO once its proved it can generate revenue (and maybe profit). In fact, one of the largest IPOs of 2018 raised $3.2 billion for Axa Equitable Holdings, a 200-year-old insurance company.
In contrast, buying into an ICO is more like being an angel or venture investor than a Wall Street investor. Several years ago, Wealthfront CEO Andy Rachleff wrote his TechCrunch article “Why Angel Investors Don’t Make Money… And Advice For People Who Are Going To Become Angels Anyway.” Rachleff pointed out less than half of startups that get seed money from angel investors go on to raise money in future venture rounds.
The ICO industry isn’t any better. A study of 4,000 ICOs by Boston College researchers found that 44% of the projects had failed within the first four months of their ICOs.
Bitcoindotcom found similar results in their analysis of 2017’s ICOs. By February 2018, 46% of the ICOs had failed and another 13% were on life support. “In most cases, investors were able to spot the signs and steer clear,” the report concluded, but noted that “not everyone escaped unscathed though: these projects still raised $233 million between them.”
Most ICOs don’t have an existing business. They may not even have a working application. Some barely have a white paper. Usually, the junk ICOs are obvious which is why doing your own research is so important.
Use listing sites, but don’t trust them
Not all ICO listing sites are evil. Even ones like ICO Bench that seem compromised have their uses. The sheer number of ICOs these sites list can help you discover promising ICOs and gather basic information. But don’t rely on just ICO Bench. Check ICO Marks and Track ICO and others to see if they give you the same information about that ICO.
Also, check ConcourseQ. This is an ICO listing site created by a community of white-hat experts who seem to delight in finding an ICO’s weaknesses. Unlike the big listing services, a large percentage of ConcourseQ’s listings are flagged with warnings. For example, the issues raised for the DCentral Capital ICO include:
- Team members not listing their roles on their LinkedIn profiles.
- Aspects of the token could make it a security.
- Claiming confirmed listings on conservative exchanges like Kraken and Bitstamp.
Despite all of the glaring issues, ICO Bench gives the DCentral Capital ICO a 3.0 rating.
Another option to consider, Smith & Crown, has been conducting blockchain research since 2013. Since the firm makes its money from industry research and consulting services rather than advertising, ICO projects can’t pay for better placement. The company’s in-house analysts write all of the reviews so ICO projects can’t buy better ratings. Smith & Crown goes the extra step to fully disclose any potential conflicts of interest by clearly stating at the top of the report whether the ICO project under review is one of the firm’s clients.
Identify the leaders and advisors
Instead of relying on third-parties, you should also do your own digging. One of the first things you need to know is the makeup of the project’s leadership team and advisory board. The team should appear on the project’s website and in its white paper. Check each person’s Crunchbase, AngelList and LinkedIn profiles to make sure they are actually associated with the project.
If anything seems suspicious, do a Google image search using the photos from the team page. If you get a lot of hits from toothpaste ads, then you know the pictures are stock photos.
Identify the early investors
If the project has already gone through a pre-sale, find out who those early investors are. Then check the companies’ websites and social media accounts to see if they mention the ICO. Identify the principals in the investment houses and check their LinkedIn and social media posts for the same thing.
If possible, see if anything on the ICO project’s site documents the level of risk these early investors are assuming in exchange for the price discounts they received. If the investors can cash out by selling their tokens immediately, then what are the odds they’ve dug deep into the project’s fundamentals? On the other hand, if the investors’ tokens get distributed over the course of 12-24 months, then they are more likely to have done the research to know how much risk they face.
Read the white paper
This can be quite a slog even if you’re familiar with blockchain terminology. You can, however, get a sense for the project team’s attention for detail based on the number of spelling and grammatical errors.
You can also piece together whether the project has a clear, blockchain-appropriate business case and a detailed vision for how it will achieve it. On the other hand, turn around and walk away if the white paper is a vague, hand-wavy compilation of buzzwords that talks about blockchaining the disruption of the popcorn industry.
Read the code and try the prototype
Many legitimate ICO projects take great pride in being open source. That should mean that they have a repository on GitHub or another site where you can take a look at the code. It doesn’t matter whether you can read code or not. What matters is that, if you could, the code is available to read.
The same is true for the project’s prototype. Can you kick the tires? Or is it still a vague idea in the back of the founder’s head?
Check the crypto media and forums
Check the more credible crypto-focused media sites like CoinTelegraph and CoinDesk to see if the project has gotten any press other than a rehash of a press release. If major investors are actually involved in the project, then there’s a good chance that reports and interviews will be there.
Take a pinch of salt with you when you visit Reddit and BitcoinTalk, but the various crypto threads can be a source of good information.
Just be careful of promotional posts. One way ICO projects market themselves is by offering bounties that award free tokens to people who promote the project on forums and social media.
A lot of crazy money sloshed into the crypto markets last year. Despite this year’s sell-offs, though, the ICO market is still going strong. Whatever the truth behind the allegations against ICO listing services like ICO Bench, the responsibility for every investment decision lies squarely on the investor’s shoulders. If you think putting a small slice of your investment portfolio into ICOs makes sense, then make sure you do your own research. FOMO is not an investment strategy. Understand the projects you invest in and make sure you can trust the project team. The coins you save will be your own.