Tips To Spot An Initial Coin Offering Scam
Similar to Initial Public Offerings (IPOs), Initial Coin Offerings (or ICOs) is a form of value investing that allows the public to get dibs on organisations that are believed to undergo high growth. Over $1.3 billion was raised by Initial Coin Offerings (ICOs) within the third quarter of 2017.
With such a large pool of interested investors, some of whom may not be well-verse in the technical aspects of blockchain, it comes as no surprise that scammers will start flocking to this arena. Cases of supposed (ICOs) and token generation events (TGEs) disappearing without a trace is not uncommon. Prodeum, Confido and BitPetite are just some of the ICO scams in this highly unregulated platform. Thankfully, there are signs that you can watch out for to identify a potential ICO scam.
Know who is the developer
First and foremost, developers should not be anonymous. While a lot of coins promise privacy and anonymity of users, this lack of transparency should not extend to the developers themselves. Interestingly, the creator of Bitcoin, well known under the pseudonym of ‘Satoshi Nakamoto’, is considered to be almost anonymous.
That said, it is important to note that Bitcoin still managed to flourish as the blockchain system did not require a trustworthy authority. Even so, it can be argued that Bitcoin may experience more success had the creator been public and known.
In a similar vein, it is important to check if the team driving the ICO is made up of renowned members of the cryptocurrency community. Ideally, they should have been involved in other similar projects previously. The person should also personally verify his involvement, be it on social media or through other channels, to ensure that his name has not been borrowed without his knowledge.
You can check if the person is a genuine member of the Bitcoin community through Bitcointalk. However, do note that professional scammers tend to buy a Bitcointalk account to gain trust as well.
Tokens need a valid use
Besides checking the team, the token itself needs to have a clear and valid use case. Being a digital currency alone without any noteworthy or significant innovation can be a red flag.
Even if there is a clear use case, you should do your due diligence by reading its white paper. It is important to take time to read through the contents and to actually understand it as most scams can be identified at this stage. Some white papers may include convoluted and empty words, or be covered with popular phrases or buzzwords that look good but do not actually make any sense. There needs to be actual technology and processes discussed in-depth and at a high level in the white paper.
Look out for charts, diagrams and specifications that seek to clarify technical processes. There should be a variety of resources ranging from the standard SWOT analysis, to financial models, proof-of-concepts, and even wallet design. It will be even better if there are product timelines to act as a benchmark to compare against other organisations.
However, do note that a white paper that seems too good to be true, probably is. If it seems to be overpromising extraordinary rewards, perhaps it is time to steer away. Unjustified guarantees of price hikes over a short run, or an impossibly large expansion of user base can be a sign of an ICO scam. A good example of an ICO scam’s white paper would be deClouds’s.
While it is common for ICOs to adopt open-source codes, it should not have an empty or non-existent GitHub. For non-technical investors, it is helpful to do a quick check on an ICO to see if it has any existing files uploaded to public repositories.
Note the supply schedule and mining structure
Another point to note would be the supply schedule and mining structure of an ICO which can reveal the intention of the founder. For instance, if a large percentage of total tokens supplied throughout the project lifetime is reserved for a small group of people, this may be a cause for concern. A scam ICO may reserve the bulk of its tokens for its developers before making the remaining tokens public.
Of course, it is difficult to tell at the ICO stage. Paycoin, for example, maximised their personal financial gain from the appreciation of the token by reserving tokens for its developers.
ICOs typically also have an escrow to hold the investors’ funds during and after the ICO. It is important to note that there should be multiple trustworthy members holding the keys such that the funds can only be moved upon all key parties’ agreement. This is also why it is important for the founders to not be anonymous, and to have credibility in the cryptocurrency sphere, to minimise the chances of fraud.
The ICO should have a soft cap, which refers to the minimum amount of money it needs to build the platform, and a hard cap, which refers to the maximum amount of funds it will raise. If the soft cap cannot be hit within a set timeline, investors should be refunded. If the hard cap is reached before the expiration of the ICO, it should cease. It should be noted that ICO scams may come up with a fake soft and hard cap and not adhere to it.
Due to the fast paced ICO environment, some scammers may even up their game by creating fake updates on chat apps such as Telegram to update the public of their ‘developments’. They may even make false announcements of collaborations together with fake photos taken off the internet. Just recently, the ICO of Miroskii has set up a website, claiming that Ryan Gosling is one of its team members and that it has around USD 830, 000 funds raised.
Remember that even a legitimate cryptocurrency can fail, much less an ICO. Talk to people whom you can trust to seek their opinion. It can be tempting to go all in in hopes of doubling, or tripling your capital. At the end of the day, educate yourself well and do the due diligence necessary before putting your money in.
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