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There were more than ICOs in , and conducting due diligence on all of them would be extremely time-consuming, even for a knowledgeable analyst, let alone an amateur investor.
This is compounded by the fact that blockchain is still considered to be an early-stage technology, with new consensus mechanisms and use cases being developed every day. With exponential growth in public interest, esoteric terminology and a lax regulatory framework, it is no surprise that some ICOs have been used to fund scams and cheat investors of their money.
While nothing can compete with quality due diligence, knowing which red flags to look for in order to steer clear of scams or bad ICOs can be helpful. Not every venture needs a blockchain, and not everything needs to be decentralized. This might seem obvious, but with all the hype around blockchain technology and its disruptive potential, it can be easy to latch on to an idea the moment its whitepaper mentions a large industry the project is purportedly tackling.
Even projects that require cryptocurrencies as payment e. When evaluating an ICO, a good first question to ask is: Empty repositories for open-source projects.
One of the key traits of many public blockchain projects is the fact that they are open-sourced. This means the code base is often uploaded to repositories like GitHub for all to examine. One of the most obvious red flags for a scam project is the lack of detail on how the technology works.
For nontechnical investors, it can be helpful to simply check if a project has any existing files uploaded to public repositories or if a project has a functioning product. While Reddit is generally not an advisable source for investment advice, sub-threads dedicated to discussions of specific ICOs or crypto assets often offer a good entry point for the more technical evaluations.
While not always an accurate litmus test for scams on their own, the supply schedule and mining structure of an ICO can be used to cross-reference other data points and validate the intention of the founders. In simple terms, a premine refers to when a portion of the tokens for a crypto project is made available to a small group prior to being made publicly available.
At times, this can be a necessary vehicle to reward developers and early investors. However, if the percentage of total tokens supplied throughout the lifetime of the project reserved for a premine is high, there is reason for concern.
Understanding who is on the team behind a blockchain project is perhaps the most important step in your due diligence. It is often a red flag if the team behind an ICO does not have any named full-time developers. Additional caution should be taken if none of the leadership team has any domain knowledge in the specific vertical. When looking at a team and verifying their experience, platforms like Twitter and LinkedIn are useful.
If members of the team claim prior association with universities or companies, double-checking with reputable third-party sources e. ICOs often list their advisors on their websites. You should also verify whether the advisors are legitimate. If something seems like a scam, it probably is. When you are unsure whether a project is a scam, it is better to err on the side of caution.
While it is possible that the lack of well-designed websites and detailed information for a crypto project is because the project is still in its infancy, it can be hard to determine whether a project is underdeveloped or a scam.
In many cases, they can be both. In those cases, interested investors can either wait for more information such as in the case of Asia-based ICOs, where information is only translated into English later on in the project , or simply avoid ICOs they do not fully understand.
Another crucial source of information for all ICOs is the whitepaper — the document that outlines the mission, technical details, team and other crucial details behind the venture.
While the amateur investor may not have the technical background to fully understand every aspect of a whitepaper, general understanding of blockchain concepts is a must when evaluating whitepapers.
Some more legitimate projects e. Ethereum offer a high-level whitepaper outlining the key points of the venture, alongside a detailed technical document that explains the technology behind the project. The lack of a clear roadmap could indicate that the developing team has no long-term plan for the project, and as such is likely to be motivated solely by short-term financial gain.
Paired with a large premine reserved for the developing team, this could be a strong indicator that an ICO project is not to be trusted with your money.
Through periodic updates distributed on these channels, potential investors can get a sense of how the project is developing. However, malicious scammers can easily create a timeline out of thin air or provide fake updates on chat apps. While the lack of a timeline is certainly a red flag, the existence of one is not a wholly sufficient condition to indicate the legitimacy of an ICO project. Deep Patel is a serial entrepreneur, marketer and the author of A Paperboy's Fable: The 11 Principles of Success.
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