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What is an ICO?

Four ways to identify ICO scams

Follow these four steps to successfully identify ICO scams and protect your investments

ICO scams dominated the headlines of the cryptocurrency industry for quite a while. One report revealed:

  • 81% of ICOs are scams
  • 6%  of ICOs failed
  • 5% had gone dead
  • 8% went on to trade on a exchange.

Some ICO scams have been high profile, with users losing thousands in fiat and crypto.  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, enroute to a valuation of over $400 per coin and a market cap of over $2.6 billion. However, it was an ICO scam.

ICO scams can be disguised as elaborate Ponzi schemes

The euphoric returns didn’t last long.  There are many cryptocurrency scams to look out for when parting with your money which BitConnect showed. 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 ICO scams are more likely to slip past early investors.

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. With that in mind, here are a few proactive steps you can take to identify ICO scams and save yourself the stress of an investment gone wrong.

1. Read the whitepaper

Reading a project’s whitepaper 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 and clear, showing that the team is interested in long-term development.

A scam ICO might have a haphazard, disorganised, unfinished, over-embellished and/or plagiarised whitepaper. Many scams may simply hire ghostwriters for their whitepapers 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 whitepapers and exude an aura of confidence. In these cases, it can be helpful to really dive into the smallprint 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, you could be looking at an ICO scam.

2. Check the GitHub repositories

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?

3. Evaluate promises

When an ICO’spromises 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.

4. Go with your gut

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.

What next?

For more information on keeping yourself protected within the cryptocurrency space, read our definitive series about crypto security. 

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