Initial Coin Offerings, or ICOs, are a popular fundraising method used by crypto companies and startups to create new blockchains, coins, decentralized applications (DApps), or services. ICO is the crypto equivalent of an Initial Public Offering (IPO) in the traditional finance markets.
While IPOs are designed for well-settled and regulated companies, ICOs are usually conducted by crypto firms that are new to the market and can be less trustworthy due to minimal oversight. Although some ICOs have yielded massive returns for early investors, a majority of them have turned out to be fraud schemes to manipulate crypto users. It is estimated that more than 80% of ICOs have been scams. However, they shouldn’t be completely ruled out, as many genuine crypto projects depend on ICOs for funding.
Crypto ICOs were very popular between 2017 and 2018, but most of them were scams and quick attempts by scammers posing as developers to grab investors’ money and disappear into thin air. The practice has nosedived in the United States after the Securities and Exchange Commission (SEC) began filing lawsuits against crypto firms for the sale of unregistered securities to the public in the form of cryptocurrencies.
However, this hasn’t stopped scammers, and they continue to steal money from unaware and unsuspecting investors. The purpose of this article is to alert you, the crypto investor, about potential ICO scams and how to vet one for legitimacy.
So, without further ado, let’s get started.
Types Of ICO Scams
ICOs come in various shapes and sizes, and so do the scams associated with them. Let’s explore some of the most common forms of ICO scams:
1. Exit Scams
An exit scam occurs when a fraudulent cryptocurrency promoter collects funds during an ICO and suddenly disappears, leaving investors and other legitimate contributors with no information or whereabouts. In 2018, at the height of the ICO frenzy, it was reported that more than $100 million contributed by investors was stolen via exit scams.
2. Bounty Scams
Bounty scams are another popular method of exploiting investors during an ICO, where the organizers promise promoters financial rewards for participating in PR activities, only for them to not keep their word and disappear altogether.
3. Exchange Scams
Scammers can mislead investors by claiming to launch their ICO on a fake cryptocurrency exchange. Unsuspecting users would put their money into the project, believing in its potential, only to be duped by bad actors.
4. White Paper Plagiarism Scams
In this scam, the bad actor plagiarizes the white paper of a credible cryptocurrency and launches it under the banner of a fake project, claiming to be a fork, with a name that closely resembles a legitimate project.
5. URL Scams
Another popular scamming technique involves scammers creating fake websites that match the ICOs of genuine crypto projects, instructing users to deposit their funds into a compromised wallet. Naive investors who fail to differentiate the fake website from the real one are tricked and their crypto is stolen.
6. Ponzi Schemes
Under Ponzi schemes, fraudsters entice investors by promising them opportunities to generate high returns from ICOs at a later stage. Scammers may lead them to a fake website and wallet where the funds are deposited and display a fake metric showing their yields. However, only when investors attempt to withdraw their profits are they met with the truth that there was no such thing, and the original investment was siphoned into the scammers’ accounts.
How To Identify ICO Scams?
Here are some tips to protect yourself from fraudulent ICOs and sketchy coins, helping you avoid potential scams and safeguard your crypto assets:
1. Read the Whitepaper Carefully
Whitepapers are the blueprint of a project, and they help you gain deeper insight into the cryptocurrency you may be interested in investing in. These documents tend to be highly technical and confusing to a regular user, but they outline the issues that the particular blockchain and crypto aim to address, their network architecture, consensus protocols, and timeline for implementing various upgrades.
If a crypto project does not offer a whitepaper, it should be avoided at all costs. In some cases, legitimate blockchain or cryptocurrency projects may provide adequate information to satisfy a potential investor.
2. Research the Team Behind the Project
The development and administrative teams are perhaps the single most important factor determining the success of any blockchain or crypto project. Well-established and successful cryptocurrencies are created and led by prominent figures, such as Satoshi Nakamoto (Bitcoin), Vitalik Buterin (Ethereum), Gavin Wood (Polkadot), Brian Armstrong (Coinbase), Changpeng Zhao (Binance), and Charlie Lee (Litecoin), to name a few.
Dishonest ICOs invent fake founders and create biographies to convince investors they are highly qualified and trustworthy. The best way to protect yourself from this fraudulent tactic is to thoroughly research the individuals who make up the team and look for their personal profiles on LinkedIn or other social media outlets. Check the number of followers they have accrued and whether they have published research papers or been involved in other credible projects.
3. Look for the Project’s Backers
Most newly created and legitimate blockchain and cryptocurrency projects are endorsed or funded by famous industry figures or businesses. Make sure to thoroughly learn about the companies or individuals supporting the project, as in many cases, fraudulent projects have been sponsored by celebrities and credible institutions.
4. Verify the Project on the SEC’s EDGAR System
A crypto project with plans to launch in the US must file Form 1-A, Offering Statement, or Form D, and Notice of Exempt Offering of Securities documents with the SEC, which should be made available for public viewing. Verify that the company or project has complied with these obligations before participating in its ICO.
If you cannot find any of these documents on the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) System, then it means that the ICO has not been registered. It is recommended that you wait, and if there is no change, that means the project may be a Ponzi scheme.
Also Read: What is the STABLE Act? – US Stablecoin Bill
Final Thoughts
ICOs are an easy way to capitalize on a promising crypto project, and some of the most successful blockchains and cryptocurrencies were fueled by early speculative investment. Legitimate projects will do everything in their power to assure you of their credibility, from registering with concerned authorities to publishing whitepapers and detailed reports, and having a team of established and qualified figures backing them.
No genuine project will hurry you into making an investment decision, nor will they airdrop tokens into your wallet, at least in the initial stages. However, due to a lack of regulation, scammers may use various deceptive tactics to fool you by creating non-existent demand for a scam token.
Therefore, it is highly recommended that you do your own research, reach out to like-minded investors, verify with regulators, and consult experts before participating in any crypto ICO. Always remember that cryptocurrencies are volatile and speculative investments, and so are legitimate ICOs and projects with wealthy backers.