To Invest or Not To Invest: Defining a Fraudulent ICO
On one hand, the development of blockchain technology allowed millions of people without large funds or appropriate education to invest their money into initial coin offerings (ICOs) and multiply their investments. On the other hand, the technology and the very idea of decentralization has given a wide variety of innovative blockchain-based projects a chance to access an alternative method of gathering a startup capital outside of traditional ways. Only for year 2017, more than 200 blockchain-based projects launched their ICOs and collected billions of USD.
Unfortunately, the astronomical mass of money is attracting not only cutting-edge ideas, technologies and top professional teams moving the cryptocurrency world forward and improving different aspects of our lives. Fraudsters of all kinds are also eager to cut a piece of this cake. Due to the complexity of the blockchain technology, its technical terminology and approaches, and regulatory absence have created fertile soil for the fraudulent ICOs disguised as decent projects. Scrutinizing each project trying to define true intents of its team is a difficult and time consuming task even for an experienced analyst, and almost impossible for an amateur investor. Nevertheless, anyone can conduct a first-level verification of an ICO project basing on the factors we are going to describe in this article.
1. No Need to Use Blockchain
While being very innovative and really game-changing, Blockchain is not a universal technology, and may not fit a specific business. In some cases, the tokenization or distributed ledger technologies can bring no profit to a particular project even be of no use for it. Many ICOs mask the blockchain necessity by mixing it with slick marketing, impressive numbers, and new markets they are aiming to take. So before making an investment decision, assess if this project really needs the blockchain technology or it could successfully develop the business without tokenization, and they do it just to engage money. In other words, ask yourself if the tokenization goal is just the tokenization itself. If you answer affirmatively, there’s a risk you a dealing with a scam.
2. No Product
ICOs are often built on an open-source platform that allows anyone to view and check the product code. If this is the case, then pay attention to the following bad signs:
- The team doesn’t publish a link to the repository, such as GitHub, where you can check the code.
- The repository is empty.
These two factors is the simplest check, they don’t require special knowledge, and most often this is enough for the first-level verification. If you want to go further and you see the repository is full of files, it would be useful to check if the files are complete mumbo-jumbo or they make sense. If you don’t know the programming language used in the project, you can ask an expert to take a look at it. For example you can read or ask a question on one of multiple forums on the Internet, such as Reddit or some others.
3. Unknown Team
This is one of the most important factors you need to verify when you assess an ICO, because future success of an ICO campaign mostly depends on the people behind the project. Hype, marketing, or even whitepaper quality are secondary on the way to success. Managers with insufficient experience or anonymous developers is a huge risk factor, and you’d better avoid such projects. Fortunately, checking a team is quite simple, because most of them publish proof links to their LinkedIn profiles where you can find information about their experience, previous jobs, companies, universities they graduated from, etc. You are right, these profiles can appear to be fake either, but the professional information provided can be checked by using third party sources. The same way, you can check the advisory team as well.
4. Token Distribution Scheme That Favors the Team
When the majority of tokens issued by an ICO is reserved for the development team, you’d better consider another project to invest to. This factor may not reveal that the ICO is fraudulent, but it shows quite obviously that the main aim of the tokenization is to maximize the personal financial gain of the team members. An example of suchlike ICO is Paycoin whose founder was found guilty of operating a $9 million fraudulent scheme.
One more factor to pay attention to is premining (or presale) that makes some amount of tokens available before a main ICO crowd sale. Presale is usually conducted for early investors and developers. If the amount of tokens reserved for a premining is too high, this is another bad sign.
5. No Roadmap
A detailed chronological development plan is a must-have factor for any ICO. If you don’t see a clear roadmap on the ICO website, the management team is likely not interested in long-term perspective of the project, and therefore is driven by short-term financial gain. Avoid such projects. However, scammers can create a fake roadmap. In this case you can ask your questions directly to the team members for example via a Telegram channel which is usually provided by ICO teams.
6. Poor Website
An ICO website is its face, and most of ICO projects have glossy, well-designed websites with wealth of information. At the same time we shouldn’t forget that a website can be in an early stage of development, or it can be under localization process for example if the ICO is Russian or Asian. In this case before investing it’s reasonable to wait until the website is completely developed and all the required information is available for investigation.
7. No Whitepaper
And the last but not the least – the project’s whitepaper, the main source of information on any ICO. It should outline the project goals, vision, technical approaches, the developing team, token generation and distribution, etc. Whitepapers are often quite complex documents, and you may find it difficult to understand all the details. Fortunately, you don’t need to. If you have a technical background, it won’t be a hard task to see the key points of the project. Anyway, a basic understanding of the blockchain technology and distributed ledger systems is highly desirable if you plan to invest into cryptocurrency projects. In addition to a whitepaper, many ICO teams provide a so called one pager, a very short and easy-to-understand document containing the project summary.