Spotting Crooked ICOs: Three Key Elements to Keep in Mind
By: Triinu Murumäe
Tags: Token Sale, ICO, Token, Blockchain, Bitcoin

Initial Coin Offerings (ICOs) have grown in importance in the world of crowdfunding and crypto-startups and this is both their blessing and curse. While the popularity of this model is the reason it emerged as a shortcut to enjoying the benefits of a decentralized venture capital investment with all the benefits of the blockchain tech, its success tree has given birth to some rotten apples. The fact that 46% of ICOs are actually stillborn opportunities from the outset speaks for itself, prompting the investors to look for clues that could make their investment less of a gambling affair.

If you are on the lookout for a tool that would help you tell apart genuine investment opportunities from malicious ICO schemes, make sure you check the following article on three essential elements for spotting crooked ICOs and save it for your future reference.

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The Bigger They Are, the Harder They Fail

First of all, you have bear in mind that even the projects whose founders’ intentions are as clean as a whistle can go south. Having said that, the issue here is empowering investors to recognize the warning signs that something is rotten in an ICO project by design and the best starting point is to familiarize yourself with the most notorious cases of ICO frauds from the past year.

One of the common indicators that an ICO will end with the writing on the wall (jail wall, most of the time) are promises that are too good to be true and packed with the descriptions of the project being a once-in-a-lifetime investment and a game-changer in the economy as we know it. Make sure you keep a watchful eye for bold and grandiose claims such as those that a cryptocurrency will leave Bitcoin in the dust and rake in overnight riches for you. Even if a project is really designed as the next best thing in the crypto world, every good manager will know that making promises you can hardly live by is a shortcut to being branded a scam artist.

But, what about words such as transparency, democracy, automation and removal of third parties as part of the offered ICO-backed business model?

Light Comes Out of Black

Black Insure, for example, wants to offer its security tokens as part of its upcoming ICO and make it possible for investors to generate income from investing in insurance on a wholly new blockchain-based model. It will allow for the removal and massive reduction of paperwork and red tape in the system for managing and creating insurance products. While the blockchain guarantees a democratic handling of everyday business by itself, transparency and removal of snags comes in form of the ability to connect brokers with capital with no intermediaries in form of insurance companies. This will bring down the cost of doing business as well as eliminate the need for human resources needed for the performance of largely unnecessary tasks.

Black’s ICO will feature two types of tokens. One of them is Black Platform Token (BLCK) which is used to keep the system up and running, including ensuring access to the platform and voting capacity.

On the other hand, its Black Syndicate Token will be given to investor syndicates which will organize their own crowd sales based on the Black Insurance platform with the goal of securing funding for these tokens. In this manner, these tokens will be propped up and covered by both fiat and cryptocurrency investments.

The entire model is based on a transparent and detailed model which takes into account existing financial controls and standards of the industry. Black Insure does not want to hide behind empty phrasings and chooses, instead, to offer compliance, transparency and dedication to realistically achievable goals.

Yet, do not fall into a trap of thinking that every project of this type will be cut of the same type of cloth! The more cunning among the ICO scam artist will surely attempt to sugarcoat their promises with as many high-sounding buzzwords as possible. Set your inner detectors to high sensitivity to these as well, and make sure you filter out any empty phrases in the promotional documents. If by reaching their final sentence you feel just as empty as you did after the introductory one, that surely means that the ICO in question should be left to its free fall without your involvement.

Seeing through Marketing Smoke & Mirrors

Progress made with the token sales often serves a badge of merit every successful ICO likes to offer as a proof of its credibility to investors. Token sales address are often shown in transparent and prominent manner, as this gives credibility to the ICO and serves as a marketing tool for an entire project. At the same time, crooked ICOs are easily recognized for their predilection to make the information about the progress of token sales as inaccessible as possible. This is achieved by providing addresses that have to do with individual contributions, making it harder for the potential investor to get insight into what has been realistically raised.

To this purpose, peddlers of scam ICO deals will employ some of recognizable smoke & mirror tactics you need to see through. One of them involves abusing the “sold out” messages in the promos, just like your average marketing grad would do to invoke a fake sense of investment urgency with prospective clients. In this case, they can promise you the coin that has been presold in several rounds of token sales. Once you are hooked to scroll to the bottom of the promo, that which has been “sold out” will magically reappear for sale in yet another round.

In addition to these cheap marketing ploys, the same crowd would attempt to swindle you out of your money by inflating the number of their subscribers. The intent behind this is to create a veneer of credibility with investors who may be bedazzled by sheer numbers on mailing lists. In reality, these figures are hardly the essential ingredients of successful ICOs.

Blockchain-Powered Moral Compass

For the opposite approach to resorting to marketing tricks, consider the social proof endorsement model offered by InsurePal, a peer-to-peer blockchain-powered insurance platform. Its IPL tokens power up its native InsurePal platform and serve to support insurance premiums realized through it.

This tokenization paired with centralization plays a key role in the running of the social proof platform which the InsurePal’s core engine runs on.

Social proof functions as a natural guarantee relying on one’s own moral compass, in which a person warrants for someone financially, i.e. at the risk of losing money. In this manner, one’s actions become a resource one can reference as a support for one’s own. In practice, it works as follows: imagine that you are a good driver with no accident record under your belt. InsurePal allows you to find an insurance for yourself as well as invite endorser who can vouchsafe for your driving ability. Upon invitation, this person will receive IPL tokens (ERC20 tokens) in exchange for providing financial guarantees for your driving record.

With this type of stimulation, the entire network develops higher risk awareness and supports its moral credibility with concrete and self-regulating mechanism which shields the network from unwanted individuals with risky social contract profiles.

Hunting for Clues and Red Flags

Another red flag in the game of steeling yourself against dishonest ICOs comes in form of the need to perform an authentic due diligence on everything that has to do with your potential investment. No, you do not have to live in Baker Street 221b to be a champion at this, but some common sense checkups should become your regular practice here.

First of all, make sure you check the related website and whitepaper provided by the company or devs. If those are poorly designed, with the emphasis on placing big companies’ logos as a substitute for authentic achievements, you should probably look for your fortunes elsewhere. Actually, if the public face of the ICO is a company, you might as well check if it is duly incorporated in accordance with existing regulations.

Another red flag is an absence of a quality road map that serves as the seal of quality of any sound business plan. Lack of clear timeliness, missing descriptions of token use cases and an emphasis on the mining structure that favors developers disproportionally should set off your Spidey sense as well.

In contrast, Black Insure’s ICO model is organized as follows: 67% for sale, 26 for team, 6% for advisors, 1% for bounty.

Similarly, the team behind Etherisc decentralized insurance platform does not want to partake in the games of hide & seek with potential investors. They want their business results to speak for themselves instead of overreliance on white papers and nebulous promises.

Once the team felt that their range of insurance-based products (flight delay DAPP, social insurance and crop insurance) could use an upgrade, they designed it in form of an open protocol platform for decentralized insurance operations. Its 16-member core team consists of individual with easily verifiable biographies with Twitter and LinkedIn references.

By analogy, checking the ICO project staff’s LinkedIn or Crunchbase profiles and references, evidence of public appearances and published articles should be a regular part of any pre-investment effort in the world of ICOs. Just do not ignore team members that act as sidekicks to the project’s head honcho. Even if everything checks out with the person at the helm of the project, this does not mean that he is not hosting a company of inexperienced and overnight experts below the deck.

If you need additional proof, you can always try to put you mind at ease by checking if a specific ICO project features development code that is updated on platforms such as Github, Sourceforge or Bitbucket. Absence of relevant links to these may point to an attempt to pad the scammers’ pockets with a clone.

The same goes for checking if the escrow service linked with the ICO project is actually compromised. These usually take the form of multisig wallets with key owners recruited among the respected community and project team members. Make sure you check that these members are credible enough and that they have transparently declared their intent to participate in the escrow arrangement.

Wrap-up

Navigating the seas of ICOs can be a difficult affair, with their shares of pirates, monsters and promises of famed but non-existing treasures. Finding the path to a safe harbor should be made easier if you approach it with a quality map which will help you avoid the pitfalls related to fake promises, marketing mirages and shady deals. Make sure you sail with your eyepatch removed and remember that the burden of being deceived in the face of clear warnings falls on your shoulders as well.