How to spot ICO scams
Four facts that will help you save your money
ICO is a whip-round with a lot of promises. It’s not an IPO — no one is selling you a share of the company. Yes, it’s another kind of crowdfunding, but unlike Kickstarter, for example, it’s not regulated at all. Everything is based on trust: you believe in the project, and you give your money to developers. What’s coming from their side? Unsecured crypto assets. And of course, there is a chance that you will be cheated and lose your money.
Since 2014, all projects that launched an ICO have raised over $2,5 billion. Some of them just made money and disappeared. Others are still working on the projects.
We analyzed more than 100 ICOs and identified four main aspects that will help you save your money and spot whether the project is an obvious scam or not.
Understand the project
Developers make their best to describe their project on the landing page splendidly. They give you more details in the whitepaper. Well, the company asks you for money, so it is in its interests to make it clear what they do.
In the whitepaper they also mention their competitors and why they are better than others. But if the project states that they are better in all parameters and, even more, they are going to destroy Google or Facebook, that doesn’t sound like truth. Just think for a second, IT giants have enough resources to invent and implement innovative ideas or simply buy them without crowdfunding.
It’s obvious that it’s better to invest in the real product rather than in promises. Even an existing alpha version with a further public release within the next half a year is better than a naked idea without any deadlines for the development.
Good ICO
Robot Vera — is an HR-robot platform that has started operating half a year before launching an ICO. During that time the project has found 60 thousand potential employees for 150 employers on the Russian labor market
Bad ICO
BitClave — they plan to create a search system BASE that will connect an audience with advertisers directly through smart contracts. It reminds of Google a bit, but BitClave is more enthusiastic and doesn’t want to take money from companies for adds and sell users’ contacts for targeting. Yet, they say nothing about the project development and status of the product.
Find out how they want to make money
Money from an ICO is needed to launch the product. But sooner or later they will run out, so developers have to understand plainly how they want to earn after. If the company goes bankrupt, the tokens will depreciate.
Companies can make money by selling something to their clients or by taking a commission for provided services. They make it clear in the whitepaper. They also write about their target audience.
To understand the potential of the project, check how much money people spend on the similar projects around the world. Usually, developers mention the marker size in the whitepaper. The more money is in the scope of this project, the more chances it has to be in demand. You can always check the data by yourself at Statista.
Good ICO
Po.et — they develop an archive with the authors’ rights to intellectual property.The project is focused on writers and screenwriters. They plan to make money on processing and verifying licenses for the authenticity of the content. The team is also planning to add ads and the opportunity to turn them off. For the money, of course.
Bad ICO
Alis — a platform for content publishing where an audience can pay to the authors by tokens for the content they like. Journalists won’t have to make any promotion materials; they can be more independent. But there is one thing that developers don’t mention — how this service is going to make money. The team is planning to develop the project using the money from the ICO. After, they want to issue and sell on the exchange 20% of extra tokens. It means that even if people start using their product but they don’t sell out new tokens the company will run out of money.
Check to whom you trust your money
Before you giving your money to people, you need to know who they are and what experience they have. If developers never worked in medicine, finance or journalism fields, they probably won’t make any innovations in these areas. If they don’t have the experience in building a business, the project can fail because of the inefficient management.
You can find all information about the founders on the landing page or in the whitepaper. You will also see links to their profiles on LinkedIn where you can check the previous experience and achievements of the team.
The company has to communicate with investors: post news and updates on Facebook, Twitter, Medium or their blog, have chats in Slack and Telegram. The active communication doesn’t guarantee the success of the project, but it enables you to keep track on the project.
Good ICO
Ambrosus — this team that provides a product tracking service explained in details about their work experience and professional achievements of both the core project team and advisors: you can reach them via LinkedIn and Twitter, or even check their scientific works.
Bad ICO
Lust — all photos of the team members turned out to be fake: they were stolen from other people’s profiles on social networks. It was discovered by the users of bitcointalk. Still, no one can reach the developers.
Check why the project needs blockchain and tokens
To distinguish lovers of fast and easy money from serious developers, you need to ask yourself the main question — will the product work without a blockchain? Decentralization won’t change that much the operation of a mobile games store or an evacuation service. What’s needed is a new technology and competitive advantages of the project.
You can always check the blockchain description in the whitepaper or the technical whitepaper.
Good ICO
Qtum — a platform for blockchain-based projects. Qtum is all about creating a new type of smart contracts that combines a transaction model of Bitcoin — UTXO (the payment history) and the Ethereum Virtual Machine (EVM). As a result, their master contract will be able to take data from external sources directly. As you can see, they obviously need a blockchain and decentralization.
Bad ICO
Pally — is similar to Airbnb, but you rent a guide instead of an apartment. The guide will show you the city, cheap shops, and good restaurants. But why do they need a blockchain then? Airbnb is more complex technically, and it works so well. Pally hasn’t created a new technology to find a person who will show you the city yet. The developers just say that you will pay for services by tokens.
Another important question — what the token gives you. It might be an internal currency that you can use for taking part in making decisions about the project’s development or get dividends.
You also need to check what happens to tokens after the ICO — the unsold tokens will be either burnt or frozen. If the company is planning to issue additional tokens, it will lead to a drop in their price. But if the number of tokens is limited and developers plan to buy them out, the price will go up.
Good ICO
Funfair — a platform to create online casinos. They promised to burn all unsold tokens within two years after the ICO. And they did. 55% of the unsold tokens were burnt even earlier — after four months.
Bad ICO
Lunyr — developers of this analog of Wikipedia claim that the number of their tokens will increase by 3%. At the same time they also say that you can mine their tokens, but every two weeks Lunyr will take 15% of all mined tokens. It means that the price of the tokens will drop. And they will need a blockchain only in future.
Keep it in mind, an ICO and tokens aren’t an outlet to the market or shares; they don’t give you any guarantees. You won’t become a company’s co-owner, and you won’t get your money back if the company goes bankrupt. But the profitability, unlike the stock market, is much higher: the tokens’ price grow by 100–200% in 3–4 months.
To sum up
- ICO — developers have an idea, and they need to raise money in exchange for crypto assets. There’s no guarantee that the project will be released.
- Understand for yourself — how real is the idea? It is also essential whether developers have at least an alpha version of their product.
- Money from an ICO will run out eventually. Find out how developers plan to make money in future.
- Before giving your money to people, you need to know them better. Check their experience and how communicative they are on social networks.
- Understand for yourself why the project needs a blockchain. Maybe developers just use the ICO hype and want to make easy money.
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