Initial coin offerings (ICOs) were all the rage in 2017. In 2018? Not so much. Last year was a rough ride as cryptocurrency projects bled out, many losing upwards of 95 percent of their value. Even Bitcoin, the kingpin of crypto, is down around 80 percent (January) as we head into the first quarter of 2019. Is there still money to be made? There’s always money to be made, though by now, ICO investors should have gotten the wake-up call that it’s not all moons and lambos.
ICOs are appealing because anybody can get involved. The new wave of venture capital is both its drawcard and its Achilles heel because the industry is largely unregulated. Initial coin offering scams have become commonplace. Now more than ever it’s important to stay on your toes if you intend on getting involved. Here are five tips to avoid falling for an initial coin offering scam:
1. Is There a Working Product?
A working product should be central to any serious investment in this space. Remember that high-profile projects like Bitcoin, Ethereum or Monero didn’t start out with massive funding. They were born out of visions of a better financial system and the actual code to back up that vision. Projects with verifiable prototypes are way less likely to be scams.
Does it promise regular returns that exceed average market returns?
It’s a Ponzi
Does it focus more on recruiting new people than any product?
It’s a pyramid scheme#litmustests
— Andreas M. Antonopoulos (@aantonop) December 1, 2017
Promises of grandeur are littered across the crypto space. We’ve seen that kind of action before. At the height of the 2000 dot-com bubble, pets.com raised a whopping $82.5 million in their initial public offering. One year later, the company was bankrupt, and they actually had working products! As the crypto wisdom goes:
“Dont trust, verify!”
2. Profile the Team Members
Accountability is the name of the game when it comes to investing in untested ideas. Profiling the team behind a project is by no means foolproof, but it does add an extra level of trust. If a team is going to ask for several million dollars in funding they sure as hell need to have some experience to back up their claims.
The most basic way to do this is for teams to provide easy to find LinkedIn profiles. This allows you to track an individual team members career progress. Does the development team have blockchain experience? Does management have a solid track record? Are there worrying gaps in a CV?
This is just a first step. Profiles can be easily faked depending on how much effort scammers are willing to put in. Good quality projects typically also attend events or host online Q&A’s allowing investors to get a feel for the team and their goals. If a project has no team page or fishy LinkedIn profiles, take your money and swiftly exit stage right.
3. Avoid Generic White Papers
White papers are a dime a dozen on the interwebs. They exist almost exclusively because of the Bitcoin whitepaper which has become somewhat of a holy grail in the crypto community. Freelance websites like Upwork are smothered with cheap white paper writing jobs. In other words, you get what you pay for. If a project is not willing to write its own white paper, that’s a huge red flag.
Scam projects aren’t offering a tangible project to begin with, and the best way to hide this is to confuse would-be investors with jargon. If you have no idea what they’re saying in the white paper, chances are they aren’t saying anything at all.
Don’t be fooled by techno-babble. Any legitimate product, whether in the traditional business world or here in cryptoland, can be simplified for people to understand. Smart projects can abstract the technical stuff away but explain the details if necessary. That doesn’t mean that a technical project is not worth investing in. If in doubt, see point one and get them to show you!
4. Watch out for Cookie-Cutter Websites & Fancy Marketing
Setting up a highly professional looking website is a piece of cake these days. It takes a few bucks and literally an hour to set up a sexy looking WordPress theme built especially for crypto. There are a number of specialist websites which cater to this:
Smart theme designers understand this and have raced to market to meet the growing number of blockchain projects. We all respond to fancy graphics and clever marketing. It’s the way we’re wired but it has almost nothing to do with blockchain. All blockchain is, is an inefficient database mostly used to remove a rent-seeking middleman. Dig down into the details and avoid the surface fluff.
5. Pay Attention to Suspicious Social Media Accounts
This one is a bit more difficult to observe. Scammers are growing smarter and savvy investors will want to be on the lookout for social media accounts with artificial followers. Bots have become a real problem online, particularly on platforms like Facebook and Twitter.
Fortunately, bots are also terrible at authentic engagement. Be on the lookout for spammy feeds with posts or tweets that don’t make sense in the context of the discussion. Building a community around your project takes time and effort. Many scammers just don’t have the patience and prefer to buy followers to create a false sense of hype and credibility.
Initial Coin Offering Scams – Final Thoughts
There you have it. Five actionable tips to help you avoid falling for an initial coin offering scam. Remember, there are no rules governing this. If you plan to invest a serious sum of money, then it only makes sense to carry out your own extensive due diligence.
Do your homework on previous scams, and don’t be greedy. If it sounds too good to be true, it probably is. Until the industry matures and we find some way to fairly regulate cryptocurrency investing, the risks will continue to be high. Don’t throw your chips in the pot if you aren’t prepared to lose them.