With the easily available protocol of Bitcoin, many fakes have shown up. Scammers have turned up in drove seeing this as a great profit opportunity. This article “How to detect Fake ICOs and Token Sales” is an analysis on how you can detect a scam when you see one.
Ever seen a fantastic website and been blown away by the over-the-top promises of 1000-10,000% returns on your money?
How many times have people invested in a business just because they’ve got a posh front office and a well-dressed and charismatic founder? Not often.
Somehow when it comes to crypto investments, people seem to lose their common sense.
With a rapid increase in digitalisation and the ‘ditch-the-middleman’ revolution, people have fewer expectations of privacy and are comfortable with platforms that require less trust. Yet, technology can’t solve everything. And it surely won’t solve a lack of common sense.
What is an ICO?
An ICO (Initial Coin Offering), to raise funds, offers a new cryptocurrency or a token in exchange for other cryptocurrencies, usually Bitcoin or Ethereum. The cryptocurrency they offer represents the underlying protocol of the company’s blockchain start-up. By right, it should have inherent value in its utility.
That’s why the ICO is a great move. People buy the token or currency, the company gets funds, and the people who bought it can use it in one way or another. It’s a win-win for all.
But with it being so easy to run an ICO means that abuse is likely. A lot of scam companies take advantage of this new and sexy term ‘ICO’ to trick unsuspecting and greedy investors out of their money.
That’s why you have to be cautious about this. Don’t invest until you’ve done your research.
Check their white papers, social media handles, and invest only after you are satisfied with the legitimacy of the company in question. If you’re new, speak to an expert and get a third opinion.
Of course, you want to learn how to fish. You want to learn how to analyse ICOs for yourself and make an informed decision. If that’s you, here are the red flags you should be looking out for:
1. Suspicious Whitepaper –
An ideal whitepaper would have a detailed description of the system architecture, user interaction, market cap, anticipated growth, plans, and other technical details like the terms and conditions regarding the use of the said tokens.
The first aspect of a legit whitepaper is a detailed problem that the said company or the blockchain project proposes to solve. Following the statement of the problem would be a description of the proposed solution. Following that will be a clear, original explanation of how the problem will be solved through the token or cryptocurrency.
If you’re interested in the ICO, the first step for you is to look through the Whitepaper. A poorly written (or even copied) whitepaper is a sign that the company is doomed to fail. After all, if the company can’t even write a whitepaper properly, what makes you think they can create a cryptocurrency?
2. Absence from Legit ICO Listings Websites –
If it’s a legit ICO, you will find it on more than one of the ICO listings sites. Some popular sites you can check are –
If the ICO that you are looking into is missing from most of these lists, then it is a sign for you to back off.
Likely, these websites that seen something suspicious about these ICOs.
If after reading through these review sites and you’re still not satisfied, check these ICOs out on social media. Social proof from the ground is often your best bet. However, don’t get carried away by enticing ads or extravagant promises. Nothing speaks scam more than a big promise without proper credentials.
Remember, a genuine company wouldn’t need to oversell themselves.
3. Incompetent Team and Advisors –
A legitimate company will showcase their team proudly on their website. Informed crypto investors see this as a must-have, and will scour their LinkedIn profiles to ensure the team is truly legitimate.
The team is where the company can showcase their ability and potential. Ideally, their LinkedIn profiles should show extensive experience in cryptocurrency or blockchain related start-ups. In the least, they should be in the tech or IT space for a considerable number of years.
If you observe someone who’s the tech officer on the ICO website and then find that he/she has only, say, sales or banking experience, you should be questioning the capability and experience of this team!
Some scam ICOs don’t even bother to cover their tracks. There have been instances where the ICO site put up names of famous people, only to have these famous people publicly denounce the association. Talk about shooting yourself in the foot!
Other times, they add names of non-existent people, and a simple search on social media will verify it.
4. Token distribution –
A real company will have a fair token distribution. A typical token sale distribution should look something like this –
- 60% – Tokens for public release
- 20% – Tokens for Founders and the team members
- 20% – Tokens for Operations
Typically, this is the proportion you should look out for. Small deviations are common, but huge differences are a big no-no. For example, if Tokens for Founders and the team members are like 50%, then it is likely that the team favours personal gain over the development of the company.
The other extreme doesn’t work too. If the founders take only, say 1%, they must either be altruistic or ready to run away once the token sale is completed. If there’s no financial incentive for the founders, then you question why they are even doing it in the first place. It has to be a win-win for all.
5. Problematic Escrow Controls –
While the ICO is going on, the funds are held in escrow. Typically the access to this escrow account is held by three individuals. One of them is on the founding or project team, while the other two are held by prominent and trustworthy community members.
This system of accountability ensures that no one person can move the money out of the account. They will need the permission of the other parties to gain access to the escrow account.
So the question is, who holds the private keys to these escrow account? If the community members are unknown or not credible, you’ll want to be careful. It might be a scam where the founders pay off someone to appear like a neutral third party.
6. Undetermined Goals –
A legitimate company is clear about it’s short-term and long-term goals. You will be able to see this clearly on their website or whitepaper – the goals, and the plans and strategies intended to achieve them. You have read this diligently and question its viability too. After all, even 95% of all legitimate businesses fail!
A scam company, however, likes to use vague and bombastic language that only serves to confuse you.
Remember, a good business proposal or whitepaper should be concise and easy to read. As Albert Einstein said: if you can’t explain it simply, you don’t understand it well enough. A company that can’t explain their goals, plans and strategies well likely means the founders themselves are confused in the least, or at worst, a scam.
So here we go: 6 things you can start with to do your due diligence. However, this is not an exhaustive list – there are other ways to detect fake ICOs and token sales.
Remember, always be sceptical and do your homework. Don’t listen to the hype. It is likely just smoke and mirrors.
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