Initial Coin Offerings (ICOs) are poised to have their biggest year ever. We’re only halfway through 2018 and 837 projects have already used the new fundraising model. Total funds raised in 2018 stands at $5.1 billion, just one billion shy of the amount raised in all of last year. This is even more impressive considering the cryptocurrency market has taken a tumble from the historic highs of late 2017.
Regardless of the price of Bitcoin, capital is pouring into the industry at an unprecedented pace. This attracts top tech talent, as well as those looking to steal your hard-won crypto. Anyone can put together a polished website and halfway decent whitepaper (just ask the SEC with their satirical HoweyCoin). To truly evaluate a project’s legitimacy, you have to look beyond the obvious and dig deeper. Here are three sure-fire ways to spot an ICO scam.
Promising Sky-High Returns
This is perhaps the best indicator of a scam. The goal of every scammer is to convince you that their offering is guaranteed to send your portfolio to the moon. While that is possible in the ICO world (Ethereum is currently up 196,251% since its presale price of $0.311) it’s impossible to guarantee.
In addition to being unethical, it’s illegal to guarantee investment returns on a security to U.S. citizens per the SEC. Legitimate projects won’t advertise guaranteed returns. Instead, they’ll tout the usefulness of their offering as the path to mass adoption. Cryptocurrency values increase because people want to use them (or think they’ll use them in the future), thereby creating an increase in demand. Look for projects that have a decent chance of gaining significant market share in the industry they aim to disrupt.
Unrealistic Use Case
As mentioned above, adoption is critical to success for cryptocurrencies. The truth is that not every problem will benefit from a decentralized solution. Drill down into the white paper and see if the team has analyzed the target market and can explain why their offering is superior to everything else.
When examining this part of the plan, also consider the larger context. Many ICOs claim to be decentralizing industries that rely on technology that’s far from market readiness. For example, Augmented Reality (AR) technology is still years away from mainstream applications. If a company is promising to “decentralize the AR industry” in the next six months, it might be a scam. Even if it isn’t a scam, it’s a red flag that warrants further scrutiny.
No Timeline For Product Launch
Blockchain projects are no different from other ventures in that they need a strong business plan. This includes a well-thought-out and realistic timeline for the product’s go-live event. If the roadmap doesn’t include an estimated launch date (or, worse yet, no roadmap at all), you should probably steer clear. Scammers only plan as far as your Bitcoin or Ethereum hitting their wallets. If they don’t share their product’s timeline, you shouldn’t be sharing your cryptocurrency.
In addition to these, make sure they have a whitepaper and read it. Check out this article titled “What Is A White Paper and How To Use It To Make Informed Investments” to learn how to use this resource to evaluate a project.