Effective Ways to Identify Initial Coin Offering (ICO) Scams

Beginner’s Guide / 04.08.2020

Over the last few years, the cryptocurrency market has been tremendously growing, especially since the 2017 bitcoin bubble. Today, there are over 6000 cryptocurrencies, and investors are even using digital monies as capital for startups. 

The phenomenon, Initial Coin Offering (ICO), whose popularity has been growing fast, involves raising capital for new blockchain projects by selling underlying crypto tokens.

The process is similar to Initial Public Offerings (IPO), although ICO is unregulated. Its freedom from regulation makes it a perfect option for bypassing the tedious and regulated process imposed by financial institutions and venture capitalists. However, it comes with a set of risks. As an unregulated activity involving financial resources, you would expect some level of fraud. 

Fraudulent entities may attempt to offer an ICO to accelerate the cryptocurrency prices up to a certain level, after which they sell all their interest. In effect, coin holders experience a decrease in value and end up in loss. Such risks have seen some countries declare ICO illegal, while others try to adopt some regulation. 

Here are six tips to help you detect fraudulent ICOs.

Evaluate Whitepapers and Websites for Red Flags

A legitimate whitepaper should have complete details about the company. This information includes details of the product, its targeted users, and how it benefits them, the token value, the team behind the ICO, and their verifiable personal profiles.

The decision of whether to participate in an ICO should rely on the details of the whitepaper. Legitimate ICOs have a whitepaper, which is the equivalent of a business plan of a company. Therefore any glossed over information or unclear data is a big red flag. If the whitepaper is missing vital information, then it’s a no for the ICO.

Additionally, the company should have an official website where investors can check out further information. Analyze the site critically while noting any false or unrealistic statements. Also, check the investors’ credentials, and if anything appears unconvincing, do not take the risk.

Be Keen on Unrealistic Promises

In the business world, there are no sure deals. So, when the promise sounds too good, it’s time to pull back and reevaluate. Investments involve risks, and you could lose even in legitimate business if you do not make sound decisions or if no proper plan is in place. Excellent opportunities are available, but you have got to do your homework first.

Some ICO scammers will come with claims of having made a fortune already, but this is a tactic aimed to create anxiety and make you feel you are missing out on something big.

If the Initial Coin Offering entity promises high returns right away or is trying to give assurance that you will make a profit out of it, take that as a warning sign and keep off!

You can take it a step further and ask to speak with other investors making a profit, but you need to tread with caution. Ask for clarifications and answers. However, if detail is critical and not provided, assume that it is missing out deliberately.

Evaluate the Supporting Team

A legitimate ICO project should not just have entrepreneurs but also an engaged and supportive community. The community should consist of relevant persons who are doing well in their fields. Scammers are aware of this and could showcase a community of over 40,000 members, but most of them are probably bots set to fool potential investors. 

To spot fake community accounts, look up the number of people signed on the platform and go through their profiles. Check the age of their social accounts, what they post, their followers, and whether there are re-posts about the project from commenters. Analyze the communications going on about the project and their nature. 

If you can verify the members’ real existence and flow of relevant communication, then the ICO could be legit.

Is There a Clear Roadmap?

Everything else may appear legitimate, but how far will it go without a clear roadmap? Carefully follow the outline of the project stages right from the past, present, and future. A serious ICO will come with an up-to-date overview, so investing is a bad idea if it is missing.

How Are They Handling Investor’s Money?

The company should follow the best practices in handling investor’s money. While you are yet to commit your coins to it, you can learn from individuals already in the deal. Check where the entrepreneurs’ contributions go, and make sure they are not getting directed to a trading account or the company is cashing them out. 

Such cash handling practices are warning signs on the team’s probability of taking off with investors’ money.

Listen To Your Gut

Every investment should come after extensive research and consideration. You can approach the ICO in the best way, and everything from your research seems legit. However, your guts could still communicate otherwise, and you feel quite uneasy. 

If your guts say something is not okay, you should follow that. Numerous ICO options are available, and you can always find another or even better offering.

Summing Up

Although they are high-risk investment options and still unregulated in most countries, ICOs are an excellent way to raise capital and earn investors huge profits. You can evaluate the warning signs for a potential ICO scam, but remember that being legit is still not a guarantee of benefits. 

Investors should do their homework and treat the investment like any other, and not a golden opportunity. You could reap high, but it’s all about probability. However, you could increase your chances by thoroughly scrutinizing every opportunity that comes your way. That way, you are unlikely to fall into the traps of scammers or investing in blind projects.

After realizing the setbacks of centralization in the financial industry, Carol has dedicated her career to apprise everyone on the benefits of blockchain technology. When she is not writing, she’s probably somewhere in the park reading a book.