First, lets look at a high profile ICO scam. Towards the end of November 2016, a new ICO began raising funds in an eerily similar way to many new cryptocurrencies of today. 4.8 million BitConnect coins (BCC) were up for sale, and more than 1 million BCC were exchanged for a total of over 1,000 Bitcoin (BTC) before New Year’s Day 2017.
To outsiders looking in, this project may have seemed well-intentioned; it even provided nice returns for many investors who got in at the very early stages. On 10th June 2017, the price of one BCC reached a new all-time high of $59.24. BCC was outperforming Ethereum (ETH) at the time, and it was up more than 30 times on its ICO price of $1.84 per BCC. The rise of BCC continued (almost exponentially) throughout 2017 and early 2018, en route to a valuation of over $400 per coin and a market cap of over $2.6 billion. However, it was an ICO scam.
However, the euphoric returns didn’t last long. BitConnect was an elaborate Ponzi scheme and ICO scam. On 16th January 2018, the project announced it was “closing its lending and exchange platform”. Just like that, BCC’s price plummeted along with its market cap, leaving many investors with considerable losses and a hard-earned lesson; be careful where you put your money.
It’s important to do your own research before making any cryptocurrency investment, and even more vital at the early stages of a project’s lifecycle, when scams are more likely to slip past the peering eyes of early investors and their rushed (or altogether absent) evaluations.
With so many new ICOs raising funds and interested in your money, it is important to be able to pick a scam out of the crowd. It’s already difficult enough to choose an ICO that will positively disrupt the blockchain space and become a great long-term investment. If you choose a project with bad intentions, your chances of coming away with anything at all are next to zero. That said, here are a few ways to sniff out scam ICOs and save yourself the stress of an investment gone wrong:
Reading a project’s white paper allows you to gain deeper insight into their thought processes and motivations. This should demonstrate clear understanding, originality and healthy pragmatism. Token distribution should be fair, clearly outlined and vested, showing that the team is interested in long-term development.
A scam ICO might have a haphazard, disorganised, unfinished, over-embellished and/or plagiarised white paper. Many scams may simply hire ghostwriters for their white papers and accept bare minimum standards, believing all they need is a published PDF document to lure in unsuspecting investors.
It’s important to note, however, that the best organised scams will likely still have presentable white papers and exude an aura of confidence. In these cases, it can be helpful to really dive into the meat of what’s on offer and analyse elements such as the roadmap, proposed solutions and writing style. If it seems like the author lacks direction and is making things up to entice new investors, the ICO could be a scam.
Blockchain projects are technological endeavours, so it’s important they demonstrate some level of competence and activity regarding code development and programming. An ICO should have open-source code repositories (usually on GitHub) that show progress and effort towards creating the underlying blockchain technology required. Development can be a lengthy, painstaking process critical to the success of an ICO. If the code repositories are empty, how do you expect the ICO to make good on its promises in the future?
When an ICO’s promises seem too good to be true, that’s probably because they are. For example, BitConnect promised its investors a long-term, steady, regular and guaranteed profit. This structure isn’t sustainable, and is the telltale sign of a pyramid scheme. Take caution when faced with similar over-the-top offers.
If something feels off about an ICO, that’s probably because it is. Take your gut feelings as a sign, and steer clear of any investments that make you feel uneasy. There are hundreds of different ICOs to choose from at any given moment, so make sure you have a solid understanding of your investments and feel good about the direction they’re heading. Take your time, be self-aware and, most importantly, do your own research.