How To Identify Initial Coin Offering Scams?

Digital currencies and blockchain technologies have opened up a new world of financial opportunities. However, the exponential growth in initial coin offerings (ICOs) has led to many scams coming to market. The trust of every individual is increasing because of the beautiful information highlighted by the Crypto Genius system.

As an informed investor, it pays to know how to identify fraudulent ICO projects. This guide will arm you with the knowledge needed to steer clear of risky ICO investments.

What is an Initial Coin Offering?

An ICO is a new form of crowdfunding used by cryptocurrency startups to raise capital. Similar to an initial public offering (IPO) for stocks, an ICO lets investors buy into a new project by purchasing tokens with fiat currencies or popular cryptocurrencies like Bitcoin and Ethereum. These tokens usually hold future value for accessing the network, product or service offered by the startup.

ICOs emerged around 2013 and have quickly become a popular fundraising model, raising over $6 billion in 2017 alone. However, lack of regulation has left investors vulnerable to poor due diligence, fraud and Ponzi schemes hidden beneath flashy marketing.

Common Signs of a Scam ICO

While not every ICO with issues is a scam, several red flags can indicate a project lacks legitimacy:

No Working Product

Most ICO whitepapers focus on a technical vision. However, lack of a working product or prototype should raise concerns. Scammers bank on selling future potential, with no intention of turning promises into reality. Legitimate teams will have something to showcase, even if a work in progress.

Unrealistic Returns Promised

Like any investment, greater rewards mean greater risks. An ICO promising dramatically high returns compared to the broader crypto market is suspect. Any project claiming consistent returns (e.g. 1% daily) should ring alarm bells. Legitimate ICOs may promote future growth potential, but beware of specific income claims.

Pressure to Buy Tokens

Scam ICOs will push investors to buy tokens within a short window or before the next ‘price increase’. Fear of missing out is a common psychological trigger. However, legitimate ICOs tend to have longer raise periods, sometimes months. If pressured to act fast, walk away.

Team Lacks Relevant Experience

Assessing the team behind an ICO is vital. Scammers will often list fake team members or profiles with unrelated experience. Research names, look forlinks to verified professional profiles, and check project roles suit the experience claimed. Relevant expertise in blockchain, software and business development is key.

Copycat Websites and Whitepapers

Scammers cloning existing projects with minor tweaks is common. Closely compare ICO websites and whitepapers against others in the space. Repurposed content with similar layouts, text, designs or code should raise red flags. Original work takes time.

Absence of Audits and Regulatory Compliance

Legitimate ICOs will vet their coding and processes through independent auditing firms. They will also proactively comply with regulations like KYC/AML requirements. Check for links to audits reports or certificates. Avoid ICOs unwilling to follow legal protocols or reveal their financial operations.

Assessing an ICO’s Viability

Beyond scam spotting, assessing an ICO investment also requires gauging the viability of the actual business model. Consider these key aspects:

Problem-Solution Fit

The project should aim to solve a real problem for an identifiable target market, not just chase trends like AI, VR, or blockchain itself. The whitepaper should clarify the pain points faced by users and how the proposal addresses an underserved demand.

Token Use Case

The token being issued should have a clear utility within the startup’s operational design, not just an arbitrary add-on. Common valid uses include access passes, membership rewards, discounts, voting rights, currency, or fueling smart contracts.

Roadmap Milestones

There should be a realistic roadmap outlining key milestones, target dates, and measurable success metrics. This shows systematic planning and accountability beyond just raising funds. Beware of overly ambitious or vague goals without progress tracking.

Development Transparency

Ongoing transparency regarding budget allocation, expenditure, and project development is a good sign. The team should openly communicate about both successes and delays. Lack of accountability after fundraising is a red flag.

Performing Due Diligence on an ICO

Here are some tips on how to research an ICO investment target:

• Check discussion forums like BitcoinTalk to see what other investors and technical specialists have to say about the project. This can reveal insider perspectives.
• Review all available supporting materials, like business plans and financial models, to gauge business viability. Request additional documentation as needed.
• Research the team members’ backgrounds, like education and past venture involvement. Verify affiliations and achievements claimed.
• Review GitHub repositories and project coding histories. Investigate audits by specialists. Complex projects should have bounty programs to identify bugs.
• Join social media groups like Telegram to directly engage the community. This gives a feel for how responsive the team is.
• Look for lawsuits, legal disputes, or allegations of fraud through Google searches. This can uncover past misdoings.
• Verify all partnerships, endorsements, and associations claimed. Scams frequently boast fake ties for credibility.
• Contact the ICO representatives directly with any questions or concerns. Legitimate teams will welcome discussions.

Protecting Yourself from ICO Scams

Here are some final tips on avoiding losing funds to fraudulent ICOs:

• Never invest more than you can afford to completely lose. ICOs are high risk opportunities.
• Use established vetted cryptocurrency exchanges when purchasing tokens, for additional scrutiny.
• Avoid buying tokens on public blockchains before ICO close dates. Wait for official release through approved channels.
• Check repositories of known scam activities, like the Crypto Aware scam database.
• Refrain from sharing personal ID and account details unless required for KYC regulations.
• Report any suspicions of scam activity to local authorities. This helps identify fraud patterns.
• Keep faith in the blockchain innovation lifecycle. Behind every scam, legitimate developers are building the next generation of groundbreaking technologies.

The world of ICOs is rife with risks, but with diligence and common sense, investors can filter out scam offerings. Assessing project viability takes time but is key to making informed investment decisions. Do your homework, trust your instincts, and avoid clouded judgement due to hype. The ICO landscape still promises tremendous opportunities to those who enter prepared.

Frequently Asked Questions

What are some other ways to identify ICO scams?

Some other red flags include unregistered entities, fake team profiles, constant shilling on forums, lack of openness to questioning, misleading or unrealistic marketing claims, and no limits set on fundraising targets. Legitimate teams have nothing to hide.

How can whitepapers expose ICO scams?

Whitepapers can expose scams through plagiarised content, technical designs that make no sense, unrealistic financial predictions, spelling and grammar errors, and vagueness about the actual product or problem being solved. Quality whitepapers take time to develop.

Should I avoid new ICO venture teams?

Not necessarily. Every project has to start somewhere. However, new teams without relevant experience or track records warrant careful scrutiny. Look for key team members with proven knowledge, skills and successes from previous ventures in similar areas.

What are the benefits of waiting until after an ICO to buy tokens?

Waiting means taking a cautious approach. Most scam token prices drop rapidly after launch. Letting the market take shape first allows you to better assess legitimacy through token performance and team actions. Desperate sell-offs are red flags.

How does KYC compliance relate to ICO scams?

Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance is required by law for financial service providers. ICOs unwilling to legally verify investor identities through accepted KYC procedures may be avoiding scrutiny of their operations.

What should I do if my research leads me to believe an ICO is a scam?

First verify your concerns through credible channels. If convinced of fraudulent activity, report the ICO to local authorities and watchdog groups immediately. Warn others privately if considering investing. And resist confronting the ICO team directly to avoid retaliation.

Are there regulations around ICOs?

Government regulation is still developing globally. However, national laws relating to securities fraud, get-rich-quick schemes, capital raising, and false advertising may apply. Legitimate ICOs will comply with applicable laws. Seek legal advice if unsure.

Where can I learn more about investing safely in ICOs?

The non-profit Coinbase offers a free educational guide on safely researching, evaluating and investing in ICOs. Other reputable online resources for ICO due diligence include ICO Crowd, Top ICO List, ICOholder, CoinCompare and Bitcoin Exchange Guide.

What should I do if I’ve already invested in a scam ICO?

First accept there is likely no way to recover lost investment funds. Report details to authorities to help prevent further victimization. Consult professionals on any tax implications of your potential capital losses for deductible benefits. And learn from the mistakes made for wiser future investment decisions.