7 Ways to Spot a Scam ICO
ICOs (Initial Coin Offerings) have become enormously popular as an almost frenzied craze. They first appeared about two years ago and reached mainstream awareness in mid-2017, mostly because a handful of financing rounds took off like rockets (regarding size and time).
It seems like money is laying on the street, and ICO investors just need to pick it up. But beware, there’s no free lunch, and there’s no easy money out there. Unfortunately, I’m confident that most of the $5.6 billion invested in ICOs last year will never be returned to investors.
As a Venture Capital investor, I’ve run two funds and screened over 15,000 deal opportunities. As an entrepreneur, I’ve raised business angel capital, crowdfunding and venture capital for my own firms as well. I can tell you: Picking winners that return your capital multiple times is very hard and takes years of experience. If you believe you can beat the market without investment experience and still be smarter than professional investors, then call it gambling.
So how do you know if you’re looking at a Good ICO or Bad ICO?
1. Does the company have a business plan? Read the whitepaper.
A whitepaper is your only chance to get in-depth details about a company’s long-term plan and vision prior to investing in an ICO. Without a proper business plan, as outlined in the white paper, a company will likely fail and your tokens will be worthless.
Good ICO: They have a solid whitepaper with extensive details about their product, technology, roadmap, company structure, business model and team. Rights for token holders are spelled out, and you have a certain degree of influence and security. They may even have a technical whitepaper and a business case to share.
Bad ICO: The whitepaper has no content, is short and reads like it was copied/pasted from somewhere else or written by an intern. It’s filled with buzz words and looks too perfect. You have no legal way of getting your money back, going to court or making someone responsible for fraud.
2. Is everyone getting rich but you? Follow the money!
The entire ICO industry is a multi-billion dollar business now. Lawyers, marketing specialists, blockchain developers, Google and “blockchain experts” can make hundreds of thousands of dollars with each ICO. Simply launching an ICO costs between $300,000 and $1.5 million. Once you say “ICO”, the price you pay for typical legal and marketing advice just tripled.
Good ICO: Money from the ICO will go into building a team, improving the product and growing the company.
Bad ICO: Money will go to the existing investors, the founders, agencies, advisors and lawyers. Ask yourself, who will benefit from the ICO? If the founders get rich with the ICO, that’s a bad sign.
3. Who’s on the team? Look for entrepreneurial leadership and a solid crypto team.
Research the backgrounds of all team members including profiles on AngelList, LinkedIn, and Crunchbase. Check out their social media profiles. Have they been active in their industry for a while? Do they regularly post articles showing industry expertise? Did they become a crypto “expert” overnight?
Good ICO: The founders have been in the market for the underlying product for years, and they’re knowledgeable about crypto or have staffed their team with crypto experts. They have a great reputation, strong advisors and a mission. They want to change the world with technology.
Bad ICO: If there’s a celebrity promoting the ICO — run! If the advisors have little to no real experience with the product being made or they get too many tokens from the ICO, I’m not convinced. If the team has no prior touch points with the crypto world, avoid them.
4. Do you believe in the idea and its potential? There must be a great underlying product.
If a company promises amazing returns but can’t tie the ROI to a real product/service with revenue streams, it’s probably a scam. Don’t ever invest in an ICO simply because the company claims their coin will increase in value. A company only has staying power if their product works.
5. Is the ICO regulated? Regulated ICOs are safer.
Regulation brings certainty to the market, reduces scams and provides token holders (especially non-professional investors) with protections. While regulators can go overboard sometimes, a complete lack of regulation means there’s a lot of risk.
Good ICO: The company is located in a country where you have a legal standard for doing business. There’s a thorough Know-Your-Customer (KYC) and Anti-Money-Laundry (AML) process that checks your ID, proof of residency and other personal details.
Bad ICO: The company is located on some sunny island where you may never see your money again. You’re not asked for identification and can invest right away.
6. Are you blindly following the crowd? Don’t be a sheep.
The ICO formula for fooling the crowd goes like this:
- Start a pre-sale. Get a killer website and flashy marketing materials. Offer coins in exchange for capital and promise that your coins will be worth at least 5x more in a few weeks.
- When the first investment comes in, pay lawyers, marketing experts, blockchain developers and online marketing channels instead of developing a product. Maybe even show up at a few ICO conferences with a Lambo and celebrity in tow.
- Then launch the official ICO. More coins are sold for a higher price. If the team hypes it up right, there’s a huge demand, which drives up the price of all coins. Everyone believes they’re a genius investor by now and they may even cough up more money.
- When the stuff starts to hit the fan because there’s still no product, pay more money to yourself and advisors as fees and then file for bankruptcy, claiming expenses drove the company out of business.
- Rinse and repeat. Start a new company in a non-regulated jurisdiction somewhere in the Caribbean and do it again.
Good ICO: You have to screen many potential ICOs. Know exactly what you’re looking for, and do your homework regarding team, market, product and funding needs. Believe in the product potential based on experiences and numbers, not gut feeling or cool marketing.
Bad ICO: The crowd loves tulips. If there’s hype, the first investors may be lucky enough to exit early and earn money. But most ICOs that are oversubscribed will have a hard time fulfilling expectations.
7. Have you done your due diligence? Learn to pick winners.
There’s a rule of thumb that says it costs $50 million to educate a Venture Capitalist. There’s some truth in it. Picking a unicorn is a 1:100 chance for companies that have already passedSeed stage. Since most ICOs are pre-seed, you have a 1:1000 chance that your backed ICO will be the next $1 billion company. ICO investments are not the safest way to get rich.
Good ICO: Only invest cash you can afford to lose. Diversify your holdings. Start small, and then increase your investment over time. Accept that you’ll lose money on your first investments, and learn from those mistakes.
Bad ICO: Don’t invest money that you need back. And definitely don’t take out loans, sell your house or cash-out your retirement account to buy crypto. Never invest more than 10% into one company.
I’m not telling you not invest in ICOs. Rather the opposite. I’d love to see ownership of the digital world more evenly distributed among society. ICOs are a great way to accomplish better equality in investing. However, ICOs are also high risk. I’m looking forward to seeing a stable and mature crypto-based investment ecosystem. That also means some bubbles have to pop.