It comes as no surprise that the cryptocurrency and blockchain world is littered with scams, but not every offering should be considered suspicious. There are plenty of legitimate projects and initial coin offerings (ICOs) out there, but for every real one there are lots of fake ones flooding the market. ICOs are now considered a multi-billion dollar industry and it is mostly unregulated, which means it attracts unsavoury people looking to profit off fraudulent platforms and “ICO exit scams.” So, how does one navigate the landscape and come out a winner on the other end? The answer to that question: Pay attention to the warning signs and ensure due diligence when deciding if a project is legitimate or a scam.
These exit scams are becoming more common, as they’re making headlines around the world. Recently, the LoopX ICO exit scam resulted in the loss of more than $4.5 million USD by investors. LoopX claimed to have created a platform that is conducive to proprietary trading using a unique algorithm. The company vanished after the token sale with the funds, and shut down all social media channels and their website.
Another noteworthy exit scam includes the infamous BitConnect scam, which used a similar technique to lure investors into what turned out to be a fraudulent ICO. In early January, the company was discovered to be a scheme and was shut down. While both of these exit scams were successful in deceiving investors, they weren’t particularly complicated and it was relatively easy to spot the fraudulent warning signs.
It’s extremely important to perform due diligence before participating in an ICO. If you are considering investing in an ICO, follow these guidelines and look out for the most obvious red flags.
1. Guaranteed Profits
If anyone is guaranteeing a profit, walk away. There are no certainties with any investment, and ICOs are not some magical ecosystem that will make money appear in your pocket. On the blockchain there are no guaranteed methods of generating income, so if anyone is suggesting otherwise, walk away.
Be weary of language that promises automated trading bots that deliver massive returns, or high returns to investors for “staking” their coins. BitConnect promised investors guaranteed profits, but in actuality, they were revealed to be a Ponzi scheme.
2. Poor Online Presence
If you are considering a new project, do your research and that means finding their online presence. A robust ICO will offer investors with a detailed team breakdown, a listing of developers, advisors, founders, security experts, and everyone associated with the project. Don’t simply head to the website and look at the “About Us” page and call it a day. Scammers are becoming more sophisticated, and they will go to great lengths to create believable, but fictitious teams.
A good example of a fictitious team is Empire Card, who kicked off their ICO with French actress, Sabine de Poncins, as their CEO “Patricia Harrison.” Don’t take a team page at face value, do some investigating into these people. Ensure they are who they say they are and that they have an online presence. Check their LinkedIn pages and fact-check their pedigrees.
Any legitimate ICO will provide a wide range of social media links, community channels, links to LinkedIn pages, and more. Check these pages for engagement and following. Any legitimate project will have numerous posts, progress reports, and developers and founders will be actively interacting with investors.
If there is radio silence, or if you can’t ask the team a direct question, the project is probably a scam. If the founders and team wish to remain anonymous, regardless of their justification, it’s also probably a scam.
3. Bad White Papers
A white paper should be able to answer almost all of your questions, if done correctly. It is the most important element of any ICO, as it presents an outline of what it plans to achieve, offers a breakdown of the technical aspects of the project, and delineates the breakdown of the token distribution model.
If a project does not offer a white paper, it’s a scam. But, with that being said, simply presenting a white paper is not a clear sign that an ICO is legitimate. Many scam ICOs pay freelance writers to produce a white paper under the assumption that a document is enough to fool investors. Plagiarized white papers are also becoming increasingly common. The DADI ICO was called out this year for plagiarizing their white paper from SONM. DADI admitted to “heavily learning” upon the SONM white paper, which included copying and pasting information.
If you are considering investing in an ICO, read the whitepaper, or at least take a few passes through several sections, to ensure it is legitimate and properly presented.
4. Questionable Premines
Premining is a common practice in an initial coin offering, and refers to tokens that are made available to a small group of individuals before the project goes live to the public. These tokens can be used to reward project contributors, developers, and investors, and if used correctly, the technique is fair. But, if the total amount of tokens reserved for premining is disproportionately large, that’s a red flag. By spotting this indication early, you can identify the true intent of project leaders.
If an ICO favours the development team or founders with an imbalanced amount of tokens, then it is worth considering whether the project is attempting to maximize personal gain, as opposed to maintaining the stability of the proposed blockchain network over time.
A good example of a scam premine was the Paycoin ICO. The creator was found guilty for operating a $9 million fraud scheme, as the majority of the tokens were reserved for the developers on the project.
5. Unclear Roadmap
Typically, an ICO project will list their development, funding, and goals on a clear timeline that is easy for investors, not only to understand, but see. A lack of a clear roadmap may indicate that the developing team has no long-term plans for the project. This issue is a red flag pointing to a motivation behind short-term financial gain. If that is the case, and there is a large premine reserved for the development team, walk away.
Often, an ICO will have dedicated community channels on Slack or Telegram that the public can join to interact directly with the team. Updates and information should be distributed through these channels, so potential investors can get a sense of how the project is developing and what milestones have been achieved.
Of course scammers can create fake channels and use bots to create chats, so be sure to monitor and look for inconsistencies in grammar or speech.
6. Empty Repositories
An empty code repository is a sure sign that an ICO doesn’t offer anything groundbreaking. If an ICO is proposing open-source code, but showcases an empty or a nonexistent GitHub, that’s a red flag. A key trait of many public blockchain projects is that they are open-sourced. Meaning, the code is often uploaded to repositories, like GitHub, for everyone and anyone to examine.
If you have a technical background you can use this published code to gauge the validity of the project. If the project lacks detail on how the technology works, it’s most likely a scam. If you are non-technical, it can be helpful to simply check if a project has any existing files uploaded or if it has a functioning product. There should be regular updates, and it should be active to indicate it is legitimate. You can also jump onto forums or channels, such as Reddit, to find discussions surrounding the technology and ICO to help answer your questions.
If an ICO seems too good to be true, it probably is. Go with your intuition when investigating the offering, and if something is bothering you or doesn’t add up, don’t ignore it. Check for the signs identified in this guide to help you navigate the blockchain landscape and arm yourself with knowledge.