Investor Beware: 5 Telltale Signs of a Scammy ICO
Tags: Crypto, ICO, Blockchain, Scam, Bitcoin

Investor Beware: 5 Telltale Signs of a Scammy ICO

Half of the 2017 ICOs have already failed. Pay attention to these warning signs before your next ICO investment.

Initial Coin Offerings (ICOs) are a new breed of investment, a hybrid baby of the crowdfunding model and the traditional company shares made available on the stock market.

This form of funding has soared over the last few years, equipping many startups with the funds to move forward, but at the same time bamboozling many investors and leaving a “digital graveyard” of failed ICOs and scam projects.

In fact, 46% of ICOs failed in 2017. It’s an astonishing number and it explains why social media giants like Twitter and Facebook have started to ban ads for the ICO offerings in a bid to stop susceptible investors from getting blinded by the blockchain and throwing funds at charlatans.

It can take more than a little common sense to sift out the potential scams and find the hidden gold, but these five factors are the fundamental ingredients of a bad ICO — make sure you consider these before investing in any project.

Coinification

The ICO trend has gone viral: every man and his dog want to have a token on their platform and companies are bending over backwards to coin-ify their offering and capitalize on the ICO craze.

It is questionable whether some of these companies could even benefit from a blockchain, never mind a token, but the blockchain hype has represented a way for companies to revive themselves by tacking the new tech onto their existing offering as an afterthought: Kodak Coin anyone?

It is not that all tokens are worthless, but that only those with intrinsic utility, or that function as equity, can have value.

Equity tokens represent a participatory role in a platform, or shares in the ownership of a company, and need to meet the three requirements of the Howey test. If this standard can’t be met, then a token may fall under the classification of a utility token, which provides users with access to a product or service.

A good example of utility tokens are Bitcoin and Ethereum, which have value because of utility enabled by possession of the token. Bitcoin, has utility as a peer-to-peer currency, and Ether is used within the blockchain for transaction fees, ICOs, etc.

Utility tokens are the most common kind, and are bound by more lenient laws, which makes them ripe for exploitation. Companies that might ordinarily adopt a traditional shareholder structure are instead implementing dubious tokens into their platforms.

It might seem obvious to point out, but tokens need utility! Whether it gives voting rights over the blockchain, or is just a coupon on the company platform, tokens without use are tokens without value.

This was illustrated perfectly by the man who made thousands from an ICO called the ‘Useless Ethereum Token’, marketed as the ‘The world’s first 100% honest Ethereum ICO’. He was completely candid about the uselessness of the token, but still managed to make enough money to buy himself 118 flat screen televisions!

Shifty Staffing

Cryptocurrency is a fresh field, a new realm of discovery, and has led many young investors down the blockchain rabbit hole.

This is no bad thing, but if you are throwing money at something, make sure it’s going to stick; don’t hand it to a bunch of unemployed architects who are trying their hand at an ICO to make some quick cash. Or worse, fakes; one Initial Coin Offering, Miroskii, pulled the wool over their investors eyes with a completely fabricated team, including a designer who looked just like Ryan Gosling!

Hey Girl. Watch out for ICO scams.

Take a look at the team of successful cryptocurrencies, and you will see finance magnates, tech CEOs, and experienced developers from the likes of Google that have the knowledge and wherewithal to drive a project forward.

The team should be qualified, experienced, and have a good track record of delivering projects. You can check this by seeking them out on LinkedIn.

Tumbleweed Community

The enthusiasm and engagement of a coin’s followers, is what creates the buzz of excitement and generates growth. A coin without community is a coin without use, and without value.

So what about those hidden gems, the obscure moonshots, the coins that noone is talking about?

Even coins that are under the radar should still have a semblance of community. Be this a developer group, or just a discussion forum.

The best way to get a sense of the strength of a coins community is through the numbers — just take a look at the facebook likes, twitter followers, and relevant reddit activity. You can also look for development activity on Github, the public software development platform.

The steady growth of relevant subreddits, twitter communities, and developer forums, tends to reflect the growth in price. But bear in mind all of these measures can be flawed, and along with the usual methods of buying fake followers on social media, paid shills have even been caught promoting particular coins on reddit.

Washout Whitepaper

Most ICOs have a flashy website, with some generic atomic background to hypnotise you into believing its legitimate, but you need to look beneath the hood.

The whitepaper is the premise of the coin; the raison d’etre. It should outline the vision, and help you to understand if the project is addressing a real problem, or if it’s just fluff.

With the exception of certain projects that are based on existing blockchains, every ICO should have a whitepaper: This explains why the altcoin should exist, how the token is integrated, and gives an overview of the technicalities.

It should also detail how investors funds will be used, and give a timeframe for bringing the project to market, including projections of profitability.

Some projects even provide technical and non-technical versions, so you can make sense of it even if you’re not a coder. Plagiarized, misspelt, and generally nonsensical whitepapers should set the alarm bells ringing.

Dodgy Distribution

Although some might see cryptocurrency as the great equaliser; transferring wealth from the rich to the poor, the bankers to the bitcoinists, what is actually happening is a little different.

Decentralisation doesn’t necessarily mean a more equal distribution of wealth, and in some cases ICOS have issued tokens in a distinctly dubious way: With large portions of the tokens kept back by the development team, and other portions pledged to to creating industry consortiums, a non-profit bodies, or a foundation to benefit the cause.

This might seem cynical, but who knows what these funds are really being set aside for, and it could easily turn out to benefit the individuals involved.

In other cases, a premine is undertaken — which is when some of the tokens are made available to a small group of investors and developers before hitting the public sale. If the proportion of tokens allocated for this is high, then this should raise suspicion from investors, suggesting that they intend to maximise their financial gain from token appreciation, instead of focusing on developing the network for all.

Paycoin, for example, was an ICO who had the majority of their tokens reserved for project developers, and whose CEO pleaded guilty to running a $9 Million Fraud Scheme.