How to avoid buying into an ICO or Token Sale that is destined to fail
An Initial Coin Offering (ICO) is an easy way of investing in a blockchain-based project that is still in its developing stages. With good research, intuition, and a bit of luck you may be buying into a future cryptocurrency with global recognition. The next ICO could be the one that brings you a substantial ROI. However, it could also be one of the many ones that fail or turn out to be a hoax.
Despite their continuous loss in credibility, ICOs remain widely popular. So today, we focus on the giveaway signs of failing ICOs and how to spot them a mile ahead.
What is an ICO
An Initial Coin Offering (ICO) is a fundraising method that companies use to build financial and user support for an upcoming blockchain project.
The ICO is the favorite tool of startups to attract capital for their first projects, especially because they have to battle anonymity. They start with a whitepaper detailing the roadmap of the project. Next, they sell coins in return for the necessary funds that will turn it into a real thing. In the end, the investors can keep their tokens, sell them, or exchange them for other cryptos or fiat money.
ICOs are the first fundraising strategies that appeared in the world of cryptocurrency, and they follow similar rules to real-world Initial Public Offerings (IPOs).
Are ICOs still worth buying?
In recent years, we have seen the development of Security Token Offerings (STOs), which proved to be more advantageous and less risky than ICOs. Even Initial Exchange Offerings (IEOs) garnered more support from investors even if their results have not always been satisfactory.
Still, Initial Coin Offerings remain a viable source of crowdfunding for companies and feasible addition to your portfolio. As long as you do your due diligence, you can identify potentially successful ICOs with stellar benefits in the long run.
Some of the best advantages that ICOs have to offer include:
- Fast-selling ICOs can help projects develop quickly
- Investors get a clear view of the roadmap ahead
- The token prices are usually dismal and available for most crypto investors
ICOs are still popular also thanks to a history of successful projects. Some of them developed into world-renowned enterprises that brought significant profit even to the smallest investors who decided to bet on them from the start. The ones who failed to read into their potential still bemoan their lack of intuition.
Some of the most successful ICOs of all times include:
Ethereum is second only to Bitcoin in terms of both market capitalization and popularity. It is both a digital asset and a platform for building DApps. During the ICO, Ether tokens were available for $0.31, and they now trade for around $240 apiece.
Also known as “China’s Ethereum,” NEO is a decentralized, open-source platform that helps developers build and execute smart contract-based applications on blockchain technology. The initial price of the NEO token was only $0.03, and now, the same digital currency is trading for around $10.50.
The risks of investing in an ICO
Despite their current success, famous projects that developed based on Initial Coin Offerings do not guarantee the same progress for other ICOs. It takes plenty of research, experience, and intuition to understand the difference between a potentially high-rewarding ICO and one that may be camouflaging a scam.
Some of the biggest risks of buying into an ICO include:
- ICOs are not fully regulated in numerous jurisdictions
- The high number of ICO proposals increases the risks of fraud and scams
- Once they hit the market, the tokens may lose most of their value due to intense volatility
In recent years, the crypto community has witnessed several cases of fraudulent ICOs, and investors have subsequently grown worrisome and reluctant to invest in such projects.
Some of the most famous ICO scams include:
Ifan / Pincoin
In 2018, a company allegedly based in Dubai and Singapore proposed two projects called Ifan and Pincoin for ICO. Through their Vietnam-based representative Modern Tech they managed to dupe more than 32,000 investors into funding a future Ethereum ERC-20 token in exchange for returns of up to 40% per month. However, one day, the developers quit the projects and disappeared with more than $660 million.
The Times referred to OneCoin as “one of the biggest scams in history.” The Ponzi scheme developed by two Bulgaria-based off-shore companies managed to get away with more than $4 billion amassed from investors between 2015 and 2017.
OneCoin pretended to sell educational packages that would also come with digital tokens called OneCoins. Investors were allowed to “mine” for them on two websites based in Bulgaria and Hong Kong. Also, they could only exchange them for fiat currency, EUR in this case, on the company-powered OneCoin Exchange, which robbed everyone of their money when it suddenly closed in January 2017.
To this date, the authorities have managed to catch, trial, and imprison most of the people behind OneCoin.
Today, most people remember Bitconnect for the memes that one of its investors inadvertently generated during their first (and only) annual ceremony in Pattaya, Thailand.
However, between 2016 and 2018, Bitconnect managed to fool investors worldwide with a Ponzi scheme that authorities saw from afar but could not prove it. Its native token, the Bitconnect coin managed to go from a post ICO price of $0.17 to an all-time high of US$463 in December 2017.
A month later, Bitconnect suddenly shut down. While the authorities managed to catch most of the perpetrators, almost $2.6 billion were lost forever.
How to avoid investing in a failing ICO
Even if ICOs have been the subject of massive scams in the past, it does not mean that you have to discredit all the projects that use this capital-raising method. If you are keen on investing in a platform that uses ICO to kick-start their activity, you should use these simple, but effective precautionary measures:
Research the development team
The first step into understanding the potential of an ICO-based project is researching the developers behind it. If they are anonymous, you should stay away from it. Also, if they are associated with shady ICOs that have previously failed, you might want to look elsewhere.
Check the news
When a company issues an ICO proposal, the news spreads through the cryptocurrency community almost instantly. With a bit of research, you can find analysis, forecasts, and experts’ opinions on the upcoming project. You can easily determine if the project is worth your money or not.
Analyze the whitepaper
Every blockchain-based project that starts with an ICO has a well-structured whitepaper. In this document, you should be able to identify whether the roadmap is realistic or not. You can evaluate the quality of the code, and determine if the terms and conditions are feasible for the long-term evolution of the project.
Engage in community discussions about it
Last, but not least, you should talk about it with other members of the crypto community. Contrary to a few years ago, there are more investors, experts, and commentators who can offer their honest opinion on the ICO that you are willing to fund.
The Bottom Line
In the end, buying into an ICO brings the same risk of failure that most financial ventures pose. You should have a good understanding of the cryptocurrency market and the developments in the industry to have a higher chance of investing in a potentially successful project.