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A Detailed Guide to Identifying ICO Scams – List of Factors To Consider

ICO scammers stole nearly $1 billion from crypto investors in 2017. ICO projects with weak business cases and inexperienced teams also sucked in investors coins before collapsing. Identifying ICO scams takes a little research and a little common sense. Using these 15 tips will help you avoid getting taken for a ride.

Dangerous Waters of ICO Investing

When the shark bites...
ICO investing isn’t this bad… as long as you DYOR. Source: Pixabay

The first few months of 2017 saw barely a dozen token sales each. That changed later in the year as the crypto market took off. Although ICO statistics for 2017’s ICO results vary from site to site — CoinSchedule reports $6.2 billion, ICO Bazaar reports $2.4 billion, while CoinTelegraph’s 2017 wrap-up reports $4 billion — what isn’t in doubt is that these token offerings raised billions.

Related: ICO Research Firms – A List of Resources for ICO Investors

Momentum carried the market well into 2018 with CoinSchedule reporting more than $18 billion raised through the end of August.

Scam-rich environment

With that much money flowing into ICOs — a lot of it from novice investors — it shouldn’t be a surprise that scam artists jumped in to skim coins from people’s wallets. These numbers also vary depending on whose report you read. A widely-cited report from Satis Group claimed 78% of the ICOs in 2017 were scams, a number that includes failed projects labeled as scams by people on Reddit and other forums.

What isn’t in doubt is that the three largest scam ICOs — Pincoin, Arisebank and Savedroid — swindled $1.3 billion from credulous investors. That’s more than 97% of the total take of scam ICOs in the Satis Group’s report.

The good news is that most investors saw through most of these scams and sent their coins elsewhere.

ICO dogs

Another problem was the well-intentioned ICOs that attracted investors with little more than an idea and some “blockchain” pixie dust. Within months, or even weeks, of closing their fundraising, these projects collapsed for lack of talent and customers.

A study earlier this year conducted by Bitcoin.com looked at the ICOs listed on Tokendata in 2017. Of the 902 projects, 16% didn’t raise any money and 30% failed soon after raising their money. A further 13% of the previous year’s projects had little activity on social media, GitHub or StackExchange, a good sign that the projects were shutting down.

These dog projects raised a combined $233 million, such a small amount that smart investors clearly were able to steer clear.

Failure’s always an option

You’ll hear no end of positivity about the ability of blockchain to disrupt everything from international banking to cosplay. But the fact is, the blockchain can’t stop weak businesses run by inexperienced newbies from failing.

Writing in the Wall Street Journal, Harvard Business School professor Shikhar Ghosh reported that 75% of startup companies backed by venture capital funds fail. Data from the US Bureau of Labor Statistics show that 20% of new businesses fail within their first year and a half go out of business within the first 5 years.

The blockchain industry is even more susceptible to failure, since distributed ledger technology is still new. Projects that seem promising today can get surpassed by new projects with more innovative approaches.

Investors looking at the ICO market need to take extra care when researching projects to entrust with their coins. For all the criticisms of the heavily-regulated world of fiat investing, agencies like the US Securities & Exchange Commission ensure that investors get the information they need to make informed decisions. ICO investors get no such protections. While resources like this guide can help, investors must ultimately do their own research to reach decisions they are comfortable with.

Signs of ICO Scams and Dogs

Identifying ICO scams and dogs
Scam or dog? You decide. Source: Pixabay

Even without deep knowledge of blockchain technology or direct access to project leaders, there are some easy and some not-so-easy steps you can take that will help you spot scam projects. Those same steps will also help you flag projects that are too weak to survive.

Related: Don’t Trust ICO Listing Websites – Do Your Own Research

First impressions

They say that first impressions count. Even the least ambitious ICO is hoping to raise millions of dollars. The website is a project’s main marketing tool and deserves a significant investment to create the biggest impact. Many of the scam ICOs were so poorly-executed that a quick look could have protected investors who only listened to shills in the forums.

Website quality

Navigating through the project’s website is a good way to get a feel for the project’s professionalism. Blockchain projects are, at heart, software projects. If a development team can’t create a decent website, then how likely are they to create a decent cryptocurrency?

Spelling and grammar

Words matter. The website has to communicate a project’s goals and convince visitors that the project can deliver on those goals. A website that’s full of spelling mistakes and terrible grammar could be a sign that the creators are only in it for the quick exit.

Many ICO projects are run by teams who don’t live in English-speaking countries, so it’s easy to excuse the occasional spelling or grammar mistake. At the same time, a study from Radicle Labs found 70% of the money raised in ICOs went to projects in English-speaking countries.

Even if a project can’t accept investors from the US, the number of crypto journalists and analysts in America makes a well-written website essential to positive reviews.

Original images

Get a feel for how many of the images and graphics seem to come from a stock photography service. Legitimate projects will create their own images for the things that matter like app interfaces and business model illustrations. If you have any doubts, use Google’s reverse image search to see if the image has been used elsewhere.

Customization

Scroll to the bottom of the page and see if they used a WordPress template. Click on the template link and compare the generic version to the project’s website. If it hasn’t been customized at all, then you might be looking at a scam.

Know the team

Know the ICO team
Know your ICO, research the team and backers. Source: Pixabay

Unless you’re a whale investor, you won’t have face-to-face meetings with a project’s team. But you still need to get a sense that you trust the people who are getting your coins. The first step is to figure out whether they even exist before deciding whether they have the chops to make the project a success.

Real people versus placeholders

A well-planned scam will look like the real deal. The website will list the project’s leaders, key developers and other team members. Headshots, brief bios and links to social media accounts and LinkedIn pages will create the impression that the project has a solid team.

Follow the links. Are the executives on LinkedIn? Can you find the developers on GitHub? If a bio claims blockchain expertise, can you find the person on the Bitcoin or Ethereum Stack Exchange forum?

Even if the answer is yes, make sure all of these people mention the project on their profiles. Scammers have been known to use people’s profiles without their knowing about it.

If you have trouble finding people, drop the website’s profile images into Google reverse image search. If the headshot of the “blockchain expert” shows up in ads for dog food, you’ve spotted a scam.

Judge their work history

The people working on a project may be real, but that doesn’t mean they are qualified to deliver on their promises. Review the LinkedIn profiles to see how much experience they really have.

Executives ought to have leadership experience, preferably as entrepreneurs. Developers need to have a track record on major software projects.

Compare that experience to the ICO project’s goals. Anyone who hopes to disrupt defense industry supply chains better have experience in the defense industry.

Check on their experts

ICO projects will often promote high-profile advisors to reinforce the team’s credibility. Guidance from recognized entrepreneurs or blockchain innovators can compensate for a team’s relative inexperience. But are the advisors real?

Do the same checks you did with the team members to see if the people are real. Look at the advisors’ LinkedIn profiles and websites. Scan through their tweets, blog posts or other social media activity.

If these experts haven’t said anything about their involvement with the project, then chalk it up as suspicious. Even if the project is real, the role of the “advisor” may have been answering a question at a conference.

Study the business plan

Question the plan
Does the plan offer more questions than answers? Source: Pixabay

Magical blockchain pixie dust isn’t enough to make a project successful. An ICO project is a business even if it’s decentralized. If the business case doesn’t make sense, or doesn’t even exist, then you’re definitely looking at a dog ICO and maybe even a scam.

Do the research

Don’t rely on the summaries you read on listing sites. In most cases, those are written by the project team themselves. You need to gather information from as many different sources as you can.

Review the website and read the white paper. Find the project’s announcement post on the BitcoinTalk forum. Search for interviews with the project’s leaders.

As you’re doing this, you’ll need to apply several filters to determine how well thought out an ICO’s plans seem.

Overblown promises

The first signs of a scam are promises that investors will get “guaranteed” returns in the double or triple digits. Those kinds of returns have happened as cryptocurrencies became more popular. But nobody can guarantee returns.

Con artists don’t even have to make the claims themselves. They can find plenty of willing accomplices by offering bounty rewards in exchange for glowing social media and forum posts.

Business case clarity

As you read through the sources, the first question you need to answer is “What’s the point?” The better an ICO project explains what it’s trying to achieve, the less likely the project is going to be a scam or a dog.

Maybe the project claims it will be yet another distributed app (dApp) platform. It should explain why it will be a better platform than the dozens of other dApp platforms out there.

Projects should have a clearly defined target market combined with a value proposition and go-to-market strategy that makes sense for the market. The team needs to explain how they are addressing competition and the regulatory environment.

If all you find is a word salad of “blockchain” and “disruption” and other crypto buzzwords, then you need to think twice about the project.

Blockchain-worthiness

You can spot particularly weak ICO projects and poorly thought-out scams by looking at their justification for using a blockchain at all. Distributed ledger technologies have a lot of strengths, but are far from perfect. Consensus algorithms struggle when it comes time to scale to larger and larger transaction rates. Decentralized, trustless systems don’t matter for enterprise applications where trust is not an issue.

Follow the money

Rolling in lambos
How are your coins getting used? Source: Pixabay

Before you hand over your hard-earned coins to an ICO project, you need to make sure you know what the team is going to do with the money. Responsible handling and distribution of investors’ coins and the tokens they get in return is a good sign that the project is legitimate.

Escrow or run

Even a well-intentioned ICO can fail to reach their minimum funding target. That will happen with most run-of-the-mill scams. The question is, what happens when the project fails?

If your coins go to the ICO team’s own wallet, then there’s nothing to stop them from walking away with everything.

If your coins go into a multi-signature escrow wallet, then there’s a chance that you’ll get your coins back from a failed project. The ICO team should only control one of the signatures. At least two independent and respectable members of the crypto community should control the remaining signatures.

Watch for whales

The ICO project’s white paper and website should clearly explain who is getting tokens outside of the ICO. Some of the tokens will get distributed to the project team. Some of them will get sold at a discount to investors, often in several rounds, before the ICO happens.

Most of the tokens going to people who have inside access is a bad sign for several reasons. A pump-and-dump scam uses gullible ICO investors to drive up the token price. The insiders then dump their tokens as the price peaks, leaving the outsiders scrambling to exit from a collapsing token price.

Even for a legitimate project, a highly-concentrated distribution of tokens could compromise the project’s decentralized structure and send it on a course to failure.

Learn how the project distributes shares in tokens to insiders and large investors prior to the ICO. Make sure the big investors are named, and check their websites to see if they claim an association with the project. Finally, make sure the tokens given to insiders, especially the founders, are locked up for several years.

Ignore the hype machine

ICO Unicorns are real wait and see
The hype says all ICOs are unicorns… don’t believe it. Source: Pixabay

Scam artists rely on hype to bypass investors’ rational thinking by instilling the fear of missing out unless people invest right now. As true in the crypto world as it is in the fiat world, FOMO (Fear of Missing Out) is an investor’s biggest enemy. Unscrupulous ICO teams will compensate for their own weaknesses by offering time limited deals. Learn to tell the difference between hype and genuine opportunity.

Find the signal

When you read the project’s posts to social media, crypto forums and its Discord or Telegram channels, you need to evaluate the frequency of the team’s engagement. If the project team never says anything, then the ICO is either a scam or run by people who don’t understand how to recruit investors.

The quality of the team’s engagement matters just as much. Most of the content should be information about the project. The team should be explaining how the project works, how it’s unique, how customers will benefit and all the other aspects of the business.

Frequency and quality of the posts from the project’s supporters matter just as much. If you are seeing well-thought-out analyses of the ICO project and references to outside media coverage, then you’re probably reading posts from investors like you.

Ignore the noise

If all you see from the project team are exclamations about the growth opportunities and strident warnings of looming deadlines, then you could be looking at a pump-and-dump.

Likewise, a social landscape full of people hyping the project and its guaranteed return is a sure sign that the project is buying its supporters with airdropped tokens. An easy way to buy cheap support, these tokens will be the first ones dumped after the ICO as the hypers try to cash out before the crash.

Final Thoughts

The initial coin offering model created a new funding option for startups in the blockchain space. Unfortunately, the wave of money flooding into crypto markets made it too easy for scam artists and weak projects to get money from uninformed investors. ICOs aren’t going away and will continue to create opportunities for crypto investors to get a return on their coins. An evolving market will make things harder for the bad guys to prosper, but the only real defense is a well-informed investor. Do your research and use some common sense before handing your coins to an over-hyped ICO.

 

Christopher Casper

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