Initial coin offerings, or ICOs, have made it possible for the general public to invest in a wide variety of innovative blockchain platforms, and provide enterprising blockchain organizations to access alternative methods of generating startup capital outside of traditional avenues.
In the third quarter of 2017 alone ICOs have succeeded in raising more than $1.3 billion USD for a broad spectrum of different blockchain ventures. This astronomical figure is more than five times the amount of capital generated through venture capital investments in the blockchain space.
2017 has seen the launch of more than 200 different initial coin offerings. Assessing each individual offering and performing due diligence on every ICO would be extremely time consuming for even the most attentive and focused analyst, as there are many different factors to consider when determining the value of an ICO.
What would be difficult for a professional analyst is virtually impossible for an amatuer investor. The highly complex nature of blockchain technology means that there is a sharp learning curve when attempting to gain a working understanding of distributed ledger platforms, with many different consensus methods and use cases to learn about in what is a rapidly developing field.
The rapid rise in public interest in blockchain platforms, combined with the technical terminology and regulatory absence have created an environment in which fraudulent initial coin offerings have become extremely common. Throughout 2017 there have been many ICOs that have attempted to defraud investors and separate them from their crypto.
While performing due diligence on each and every investment is essential, there are a number of obvious red flags that can be used to identify fraudulent initial coin offerings quickly and effectively. In this article, we’ll outline the six most obvious signs that an ICO may be fraudulent.
6 ICO Red Flag:
1. Empty Repositories
Many initial coin offerings propose an open-source platform that makes its code available to the public. If an ICO proposes an open source platform but doesn’t offer a repository link, such as GitHub- or the repository is empty- this is a key sign that it may be fraudulent in nature.
Open source platforms upload their code to repositories such as GitHub to allow the public to audit their development process. Individuals that possess blockchain programming and development knowledge are able to assess the code published by these platforms and determine whether they are valid or not.
One of the most clear-cut signs that an initial coin offering is a scam is a complete lack of detail on how the underlying technology that drives it operates. It’s not necessary to be a programming guru to assess the veracity of open-source blockchain projects- simply checking whether a project has uploaded files to a public repository is an effective method of determining whether it has a functioning product or not.
If you’re not sure whether the code provided by a platform is legitimate or not, there are many forums- such as Reddit- that provide in-depth discussions on the specifics of open-source blockchain platforms that serve as an accessible entry point to the finer technical aspects of ICO assessment.
2. Use Cases That Don’t Need Blockchain
Blockchain technology, while highly innovative and disruptive, is not ideal for every use case. There are many ventures that have no use for tokenization or distributed ledger technology. While this may seem like an obvious point, the massive hype surrounding blockchain tech can make it easy for unsuspecting investors to be led astray by slick marketing.
Many initial coin offerings present compelling arguments in their white papers, outlining massive markets that could potentially be massively disrupted by blockchain tech. It’s important to assess whether there is a real use case for blockchain technology in any project- even successful platforms like Steemit, which pays users for contributing quality content- could likely function by using an existing cryptocurrency such as Bitcoin.
When assessing an initial coin offering it’s important to ask yourself whether you believe the project truly needs a blockchain or a native token. If the answer is no, then it’s highly likely that the ICO in question is a prime example of “solutionism”, or using crypto for the sake of using crypto, or potentially a scam.
3. Anonymous Teams
One of the most important steps in performing your due diligence when assessing an initial coin offering is determining who is behind the project. Regardless of how attractive an investment opportunity is or how large the market it targets may be, the success of an initial coin offering hinges on the quality and composition of the team creating it.
Anonymous developers and platform founders is a massive red flag. If an ICO has not named any full-time developers, or if the leaders behind the project have little to no experience in disruptive technology, then it’s likely that the platform will fail. If there is no information available regarding the team at all, avoid the ICO at all costs.
When assessing the experience of an ICO development team, it’s important to take a look at the social links provided by the project, such as LinkedIn profiles. While it is possible to fake these profiles, most LinkedIn users provide details on their prior association with companies and universities that can be independently fact-checked with third party sources.
Many initial coin offerings leverage the knowledge of an advisory board in addition to a development team. It’s essential to check the experience and veracity of these individuals as well to ensure they are legitimate.
4. Mining Structures That Favor the Development Team
The mining structure of an initial coin offering is not a foolproof way to assess the legitimacy of a project by itself, but cross-referencing the data points provided by a project on the supply schedule of tokens can be a powerful method that illuminates the intent of the project leaders.
Premining is a term that refers to tokens that are created and made available to a small group of individuals before a token sale goes live to the public. In some cases, this process is used to reward early investors and developers. If the total amount of tokens reserved for a pre-mine is disproportionately high, however, this is a cause for concern.
Paycoin, for example, was an initial coin offering in which the founder was found guilty of operating a $9 million fraudulent scheme. The majority of tokens in the Paycoin ICO were reserved for the development team.
If an initial coin offering heavily favors the development team, then it’s likely that the true intent of the project is to maximize the personal financial gain of team members from the appreciation of token value, as opposed to maintaining the proposed blockchain network over the long term.
5. No Roadmap
Most initial coin offerings provide potential investors with a detailed chronological list of their development and funding goals. If a project doesn’t provide a clear road map, then it’s likely that the developers and project leaders have no solid plan for the future- which is a key red flag that the project is a scam.
If a project delivers no comprehensive road map and reserves a significant amount of pre-mined tokens for the development team, then it’s almost certain that the project is driven by short-term financial gain. Many initial coin offerings also provide investors with a Telegram or Slack channel that can be used to communicate directly with the development team and ask questions or access periodic updates.
It is possible, however, for scammers to create fictitious timelines or deliver fake updates via chat channels. Always assess multiple factors when attempting to determine whether an ICO is fraudulent to not.
6. No Whitepaper Or Detailed Information
When assessing ICOs, Occam’s razor is a highly effective tool. In most cases, the simplest explanation is usually the correct one. Applied to ICOs, if something appears to be a scam, it probably is. If you feel as through a platform may be a scam, then it’s probably best to refrain from investing.
In some cases, the website for an initial coin offering may appear under-developed or fail to deliver comprehensive information because it’s still in an early stage. In the earliest stages of an ICO it can be difficult to determine whether it is a scam or not.
Often, these platforms can be both. If you’re unable to find detailed information regarding an ICO, then it’s best to wait until more information becomes available before investing. Often Russia or Asian-based initial coin offerings provide scant information until bounty projects can deliver an English translation, which is an understandable delay.
The most critical source of information on any ICO is the white paper. A white paper should outline the mission of a project, its technical aspects, the details of the team behind the project, token generation and distribution, and any other details that are relevant to the project.
While amatuer investors may find white papers somewhat daunting, it’s not necessary to possess a technical background in order to understand every single line of a white paper to determine whether it is legitimate or not. If you’re investing in crypto, however, it’s important to possess at least a basic understanding of how distributed ledger systems work.
Many high-level projects provide white papers that outline the details of a project in addition to a yellow paper that provides highly technical information. Good initial coin offerings often also deliver a “one pager” that delivers a succinct high-level summary of the project in relatively simple terminology.