For all those who dream of making millions by investing in cryptocurrencies through Initial Coin Offerings or ICOs, beware of ICO scams. Studies have revealed that ignorance of general investors regarding the underlying principles of digital currencies and the related financial products is being used by several companies and people to defraud them. Apart from the ignorance of investors, absence of adequate regulation has also led to such scams.
According to a study by an ICO advisory firm, Satis Group, of all the large ICOs in recent times, 81% have been frauds, 6% were failures, 5% went dead and only 8% were legitimate. But does this mean that one should stay away from cryptos altogether? No, the point here is that one should invest wisely, only after having researched and understood the coin, its platform and its applications. It is always wise to gain some knowledge about how cryptocurrencies work, what the risks involved might be and what precautions one can take to prevent falling prey to scams.
ICOs: Things to Watch Out For
A recent study by the North American Securities Administrators Association or NASAA identified ICOs and cryptocurrency-related investment products as emerging investor threats for 2018. An ICO involves the sale of digital tokens in order to fund a project, usually related to a blockchain. So, how do you identify or check whether an ICO is a genuine one or a fraud? The first and foremost principle every investor should take note of is that any offering that promises unbelievable returns or returns that are too good to be true is unlikely to be genuine. Investors need to also know that there are no certainties in the blockchain ecosystem and thus no proven or guaranteed methods of generating profits, especially unusually high profits.
Here are some other things to watch out for before investing in an ICO:
- Incorporation: Check whether the company offering an ICO is a legitimate one that has been incorporated under established norms. Check the country of incorporation and find out whether the company has complied with the prevalent laws in that country.
- Promoters and the Team: Find out more about the promoters, team members and the advisors for the ICO. Check with third party sources and ensure that the promoters are actually capable of implementing the project they have undertaken. This can be done by checking the LinkedIn or other accounts of the promoters and finding out about their experience and previous associations.
- No to Ponzi Schemes: Staying away from offerings that work like Ponzi schemes or multi-level marketing companies is prudent.
- Online Presence: A poor online presence or lack of details about the project to be funded is a sure sign that something fishy is going on. A genuine offering will be accompanied by detailed information about the project, ways to implement it and the people involved. A genuine project will offer investors a chance to interact or satisfy their queries via social media, chats or other means.
- Links to Code Repositories: Check the links to the Code Repositories provided by the company running the ICO. If an ICO links through to an empty repository or doesn’t provide a link at all, then it is likely to be fraudulent.
- Extent of Pre-mining: Check whether the ICO involves pre-mining, which is the practice of offering tokens to a small group of individuals before the crowdsale goes live. In case the number of tokens reserved for pre-mining is huge, investors need to investigate further.
- Check the Roadmap: The roadmap of the project to be funded by an ICO provides a good idea about the genuineness of the promoters. The absence of a working platform, prototype or any code at all may be an indication that the ICO is an exit scam.
Adequate research and analysis of the road map and other information, keeping your eyes open for any signs of a possible scam, are very important if you want to avoid falling prey to blockchain fraudsters.