More than $3.5 billion was raised in Initial Coin Offerings in 2017. The new crowd funding phenomenon is surpassing traditional forms of raising start up capital. Bitcoin’s success has a lot to do with the popularity of ICO’s as people scramble to be part of the action.
ICOs give investors an opportunity to participate in exciting decentralised projects in exchange for tokens which can be used on the platform, traded or used to make purchases. Early adopters are given discounted rates and rewarded with bonuses. The expectation is that their value will rise with time.
But this new and unregulated industry is also a fertile ground for scams. For one, many ICO investors are unable to separate the chaff owing to the technical nature of the blockchain technology. Many have already fallen prey to nefarious schemes and a number of these projects will come tumbling down even if they are experiencing an initial surge in their value.
Although an analogy is usually drawn between ICOs and IPOs, they are not quite the same.
Unlike IPOs, ICOs are launched often by fledgling companies often with no tangible product. The proposition which is yet to be realised is contained is a simple and straightforward document called the Whitepaper.
IPOs on the other hand are floated by reputable companies which a demonstrable product which has been tested and shown to be working in the market.
These and the fact that ICOs are unregulated make it the perfect ground for fraudulent activities. There are now hundreds of ICOs in the market most of which have sprouted in the past year. A good number of them are outright frauds.
Here are a few tips to help you identify ICO scams.
Anonymous Developers
Let’s take a step back. In ordinary circumstances, you wouldn’t give your money to a stranger in the street just because he has some superfluous idea.
Unfortunately, this what a good number of ICO investors do every day; throwing money at useless ICOs with no value proposition and with totally anonymous developers.
Let’s face it. Why would anyone hide his identity if he is indeed onto some great product? Many would argue that Satoshi Nakamoto is an anonymous. The difference however is that he developed a network that has since proven itself and does not need the validation of any central authority.
Application coins on the other hand should prove themselves. They promise to deliver a product and you should be able to gauge this from the team behind it.
Do they have the necessary experience delivering such products in the past? What is their experience? Who handles management? What is their track record? Are they forthcoming with information about the project?
Social media is one great way to research about the personalities behind an ICO. Have they been involved in similar projects before? A generic social media profile indicates that something might be fishy.
If you cannot answer these questions satisfactorily, chances are that you are about to be robbed of your money in broad daylight.
This is not to deny the fact that that there are entirely justifiable reasons for developers to want anonymity. Experience however shows that the reasons are often nefarious.
Caution: A good team with a solid reputation elsewhere is no guarantee that the product will work. Cryptocurrencies operate in a totally different space with no regulation. They therefore require a totally different approach.
Use Case
The reason you want to participate in a project is the fact that the product has a real use case scenario. The same applies to tokens? How do the developers propose the token will be used?
If they do not serve any real purpose, the tokens are not likely to sustain their value beyond a few months. The age of simply developing cryptocurrencies for their sake is long gone. Users are looking for real utility. It is the only way to gauge their value.
Ethereum for example comes with the innovative smart contracts making trustless transactions possible. IOTA makes the internet of things possible by allowing machines to communicate seamlessly.
Ripple promises to cut payment transfer costs by as much as 60% and has already been tested by hundreds of financial institutions. Chances are it is going to come out of the pipeline very soon.
Does the ICO you want to invest in have any value proposition?
Unrealistic Goals
While you should scrutinize an ICO for their utility, you should similarly be able to detect if their goals are unrealistic. This means you should have a sense of what is possible and what is not.
This is not new. You exercise your judgement in everyday life and you shouldn’t suspend it just because you are in the cryptocurrency space.
Goals are set in a document called the whitepaper. Most people do not go through this document yet it is an important part of making your decision whether to contribute to a project or not.
A whitepaper is simply a roadmap to a project. An overly optimistic roadmap should raise suspicion. An unrealistically short development schedule only serves to show the inexperience of the team behind it. It could also be a tactic to attract unsuspecting investors.
The blockchain technology has a lot of potential but it is not going to solve every problem. Take time to educate yourself about the exact potential and limitations of the technology to avoid falling prey to such schemes.
Product
Online forums are one great way to arm yourself with information about ICOs even when you do not have the technical knowledge. Social media is also one great way to gauge the value of a given ICO.
Remember, perception is equally important. Most of the ICOs currently in the market simply ride on the good sentiment out there.
Be sure to check the project code as well. Is it available for scrutiny in places like github? How original is it? Most ICO scams have projects entirely copied from other tokens often with very small tweaks.
Check if an ICO has a unique proposition. Has the same idea been presented before. Is there a similar product in the market? If there is an equally great or even better product in the market, chances are you are participating in someone’s get rich quick scheme.