How to Spot Scam Initial Coin Offerings
Scam Initial Coin Offerings
Within the crypto world, crowdfunding is now a very popular method of generating funds. An ICO launch, which is aimed to engage capital to a project, is one of the most prevalent and profitable ways to crowdfund.
On the global market, the number of crowdfunding projects is increasing every day. The number of ICOs launched between June 2017 and June 2018 is shown below:
The competition is simply too great for dishonest ICOs, and many of them are turning to fraud and establishing targets that are unlikely to be met. These are referred to as "scam ICOs."
While initial coin offerings (ICOs) are a multibillion-dollar industry in general, they are unregulated, therefore scam ICOs are not uncommon. It's difficult to come up with appropriate criteria to discern between a scam and a legitimate initial coin offering when looking at lists of newly announced initial coin offerings.
The following are the primary issues, with the exception of projects whose staff intended to just perform an ICO and then flee with the funds:
There is no real business or need for the ICO as a fundraising tool, and there are no plans to grow it further.
Blockchain has yet to be implemented in a real-world enterprise.
This is why it is critical to learn how to recognise the signs of a scam ICO in order to avoid being duped by ICOs that do not provide data security, financial transaction legality, or protection against unfortunate events.
To determine whether or not an ICO is a scam, one must have extensive, specialised expertise. When it comes to frauds, people are inventive.
Here are four fundamental categories of scam ICOs, as well as their distinguishing characteristics, to help you separate them from the others and save time, money, and resources.
Consider the following scenarios:
1. The company is completely worthless.
Investors will not profit from a company that cannot offer its consumers something meaningful in their sector of interest and instead invites them to invest their money in an ICO that is likely to fail. Anyone who joins the campaign will undoubtedly fall into this trap.
A lack of genuine components is a dead giveaway that a project is a con. The following should be included in ICOs:
a well-thought-out concept
a product that will be followed by a large number of people
structure with a basic design
application on the blockchain
economics of tokens
a sheet of white paper
a team of experts
a technical blueprint
a strategy for action
Here's a visual representation of the world's biggest cryptocurrency hacks and scams:
You can also think about this list of ICO blunders that have a negative impact.
It is not worth paying attention to a company if it does not providing the above-mentioned components for a successful ICO operation.
2. Blockchain Isn't Being Used
When looking at a white paper, the first thing to look at is if it predicts viable solutions to the challenges that blockchain promises.
To begin, blockchain is a digital database that offers access to shared, duplicated, and synchronised data in the form of a token that is visible to all participants in a block.
A smart contract is a useful tool for assuring agreement credibility. Consider the following key advantages for investors:
The number of blockchain use cases is growing, indicating that they are worth considering for businesses in any industry. Check out these blockchain use cases to see how it can help businesses succeed in a variety of ways.
There is no space for blockchain application if there are still third parties (intermediaries) in the solution. Blockchain provides a payment mechanism that eliminates the need for financial intermediaries, making transactions almost irreversible. This lowers transaction costs and allows for micropayments.
Companies that do not use blockchain technology in their work processes are the second category of scam ICOs.
3. White-Paper Development Gaps
ICO founders devote a lot of time and effort to ICO development at this point, offering a full description of their project in a white paper. Collect information on the company's supporters and figure out what kind of solution it will provide the global market.
Check to see if a company has a realistic, complete application plan in place, such as a well-written white paper.
Support from the Community
If the company plans wisely and has the proper people on board, it will be able to attract a growing pool of potential contributors from all over the world. The definition of community support is as follows: the more supporters a firm has, the more credible it appears in contrast to competitors, and the more likely it is to raise a large sum of money.
It's a good idea to find out if a company obtains funding from other sources, and if so, how it affects the company's duties.
Another factor to consider is who the company's owners are and what percentage of the company they own. A conflict of interest among stakeholders is one of the most typical reasons for corporate failure nowadays, and no one knows which working scenario will be followed later if a company changes positions.
Detailed technical and financial information
A white paper, which provides a detailed overview of the present or developing technology, is used by many ICOs to make their work processes easier. The following are essential components of a well-written white paper:
The company's location and contact information
At least 32% of ICOs cannot be identified as a legal organisation, making it impossible for investors to learn about their origins, locations, or creators.
This makes it difficult for them to comprehend the regulations and legal protections that they have. Furthermore, investors are given options in the event of fraud, theft, or loss.
It's evident that a corporation presenting itself for fundraising activity without noting a verifiable physical location is a scam.
Vision, Mission, and Objectives
A successful firm must stand out among millions of others, therefore it must have its own unique idea, a compelling vision, and a global mission that can bring people from all walks of life together to achieve a common objective. An ICO with a lot of potential and well-trained developers seldom makes huge promises, instead focusing on the opportunities it provides. Furthermore, no seasoned developer would ever make a token price prediction.
Promises aren't appropriate in the business world because no one knows what will happen afterwards.
Product Specific Information
The product should be valuable, unusual, and deserving of attention – and, of course, reasonably priced.
The Existing Issue and the Company's Proposed Solution
Investors should ensure that the application can solve a real-world problem and that they understand how people would benefit from their investment.
It's also crucial to keep an eye on and evaluate competitors' markets to see if they're attempting to solve the same problem. They might be able to come up with a better answer.
There are many distinct sorts of tokens, each with its own set of qualitative and economic characteristics. The white paper must include information on the intended purpose of the issued coins, their number, specifics on when and how reserved coins can be retained, the potential of liquidation, and all purchase terms.
If a token's multi-signature escrow regulations aren't in place, or if the entity allows the transactions, the money vanishes. Such characteristics are a dead giveaway that an ICO is a hoax.
The white paper should provide all of the information regarding the token standard that is required. For example, if we're talking about a platform built on Ethereum, we'll need to specify the sort of token that will be used for both the ICO and the platform's real operations. As you can see, Ethereum currently supports a rather extensive set of standards:
On the Ethereum platform, ERC-20 is widely used. It was found to have some flaws by users, thus other standards are improved versions of it.
Unlike ERC-20, ERC-223 has the “tokenFallback” function, which can also be used as the “approve” function. This gives the receiving contract the option to reject the tokens or take other actions.
Users of ERC-621 can take advantage of two extra functions: “increaseSupply” and “decreaseSupply,” which can be used to increase or reduce token supply. They can also adjust the token supply's size.
ERC-721 is a non-fungible token, meaning that each token is completely unique and has a separate value for each user.
ERC-827 allows a token to be transferred and approved by the owner before being spent by a third party.
Each of them has its own set of characteristics and legal privileges, which can mean different things to different people.
The white paper should also include any additional requirements for listing a token on a regulated exchange or alternative trading system (ATS).
Beginners or unqualified members of the team presenting the company to possible investors are not people who can acquire credibility in the idea. As a result, previous success examples' relevant experience is a sign of management quality and professional attitude to work. A perfect team would include experts in content creation, editing, marketing and public relations, social media marketing, community management, design, coding, and targeting. In addition, any information on engineering experience, abilities, qualifications, and other relevant characteristics should be underlined. Another clue that a company is not a hoax is a large number of links to recent successful initiatives.
Another piece of advice is to look at the social media profiles of corporate representatives. Make contact with them and ask them some intriguing questions. Also, look for feedback on forums to get an idea of what people think about the company. Identify members of the ICO team and keep an eye on them by watching their social media sites. Determine whether team members are dedicated to the project's success or whether this is just another new idea because ICOs are popular right now.
Risks in the Industry
There have been numerous examples of successful ICOs that have later collapsed or been completely revamped, creating insecure conditions for token holders who may be shocked by a new intended use. To fix this, look for an alpha version of the product that is available and see if a token holder has the opportunity to attend conferences, meetings, and events to stay up to date on all new developments. A defined strategy with clear milestones should also be available, as well as access to beneficial relationships.
It's worth discussing information such potential vulnerability to hacking, data loss, and interruption, as well as legal considerations (such as privacy concerns and data portability across countries). Be mindful of all potential dangers in the future.
It is a well-known fact that financial difficulties are of paramount importance to investors. Because the underlying technology solution is so important, the technical challenge and solution should be described simply.
A well-developed code repository, such as Github, is a good sign. It allows potential investors to evaluate whether the code is well-developed. Furthermore, their archive may be outstanding, deficient, or private. This is also essential information. If a company doesn't provide links to code, or if it's a clone with a few tweaks, it's most likely a scam ICO.
We require a section on Blockchain Architecture in this case.
What blockchain solution should be adopted, and why should it be employed?
Different solutions are examined.
Platform technical specifications
Applicability and explanation of smart contracts
Description of a use-case
Applicability of Token Economics
Because an ICO is dependent on the distribution of tokens, blockchain implementation is a must-do stage, as tokens must be decentralised to ensure efficient workflows. This method simplifies the current financial system while also decentralising shares and trade. Token circulation may be conducted out in a more appropriate manner with DD involvement in the platform ecosystem.
The revenue and benefits a firm promises are dependent on the quality level of its development, therefore token economics plays a big role in investors' life. First, let's outline the factors that investors should think about:
How will transaction fees be paid (would they be included in the token, or will they be paid separately)?
Is the token intended to grant access to a product, interaction rights, or ownership rights to a value?
Is there a way to govern with the token, such as the ability to vote or influence decision-making and/or the development of a new product or service?
Is it possible to increase the token's value in the network or on a relevant market, or to be rewarded for active work?
Is it possible for the user to gain additional value by sharing or disclosing token data?
Is the company planning to sell or purchase any tokens?
Is the token required to join a network or any connected organisation, or does it function as a security deposit, a primary payment unit, or the primary accounting unit for buying and selling things?
Is it possible for a selected blockchain to distribute earnings and other benefits to token holders on its own?
Is there any business strategy in place to mitigate project cash-flow gaps due to token and crypto volatility if the token is claimed as a utility?
However, no matter how high-quality the white paper is, if it is full of jargon that have no practical significance, it is most likely a hoax.
4. Excellent preparation is meaningless if it isn't put into practise.
It's fantastic to have covered all of the must-have aspects for a strong ICO, but the following information adds genuine value and should be addressed as well:
how the organisation intends to implement a blockchain solution
how much cash they require
timetables (roadmap and business plan with the description of MVP stage development)
A major risk for all investors is that a company may have a well-written white paper, but little comprehension of the practical implementation plan in practise. Another reason to term an ICO a scam is because of this. Marketing budgets, well-thought-out branding, fantastic intro films, and SEO wizards all aid in attracting and retaining potential investors.
While reading a white paper, buyers and sellers may encounter hyperbole, which is an endemic problem. So be aware that not everything you read will be accurate.
More than 90% of ICOs fail in practise, especially when there is a technological risk, and this is quite natural. Another fascinating figure to remember for all investors is that 90–95 percent of ICOs will be worthless in three years, regardless of whether they are a scam or not.
Analyze all available information about a company in depth in order to arrive at the best decision for future collaboration. Pay close attention to the details of the roadmap and the company's approach to determine what it will do to achieve all of its stated objectives.
Remember that appealing, promising "to-do lists" are not an absolute guarantee that the organisation can complete everything, especially under pressure.
To summarise, bitcoin is reshaping the global financial system, and scam ICOs are merely a short-term emergency that the crypto community is attempting to eliminate in order to avoid negative consequences.
Be intelligent and cautious whether you are a novice or a seasoned investor. Analyze each offering thoroughly, as comprehensive research is an important part of the investment process that many investors ignore when evaluating ICOs.