How to avoid scam ICOs
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If you’re unfamiliar with ICOs (or Initial Coin Offerings), you may be missing out on one of the most innovative fundraising methods in the digital age.
In fact, an impressive $5.6 billion was raised through ICOs last year, across a total of 435 international projects at an average investment of $12.7 million.
As with any new and innovative investment vehicle, however, ICOs remain vulnerable to rogue operators. In this edition of #CryptoEssentials, we’ll take a look at some simple steps that will minimise your risk of being caught up in an ICO scam.
What is an ICO?
Before we start, let’s quickly explore a few ICO basics.
In simple terms, an ICO is an unregulated means through which funds are raised for a new cryptocurrency venture. This requires project owners to sell a percentage of their tokens in exchange for cryptocurrencies such as Bitcoin and Ether, in order to reach a predetermined level of investment and successfully achieve their objectives.
Not only have ICOs proved to be extremely innovative and disruptive within the financial space, but they’ve also broken down the barriers that have historically existed between professional investors and token buyers. This has made them increasingly popular over time, with last years’ figures highlighting the growing appeal of ICOs across the globe.
However, as the popularity of ICOs has grown, so have the number of associated scams. Now, while it’s important to remember that not all ICOs are bad, you’ll need to take practical steps towards minimising your risk and guaranteeing the integrity of a selected project. Here are some initial ideas:
Meet the Team
Assessing the people behind an ICO is always a good place to start as a potential investor, as these are the individuals who you will ultimately entrust your money to.
So, get an understanding of who the project members are and which ones are listed as advisors. Check out their profiles through LinkedIn and any other social networks that they may be active on, but don’t just look to see if they are real people as their identities could easily be used without their permission. Additionally, take the time to see if they have mentioned the ICO and are actively promoting this across their various social profiles.
Another simple way of checking is to search for these individuals on the Internet, before validating their technical background, proven knowledge and any previous jobs that they’ve held in their industry. You can do this for all of the people you find involved in an ICO team.
Quite often you will find that this information does not match the data contained in the ICO. At this point, ask yourself “Does this team have experience to execute the vision?”
The Visibility of the ICO
On a similar note, is there a website or active social media channels for the ICO? If so, be sure to join the community and see what conversations are taking place, while also reviewing any content that has been published recently.
You will not be the only person who may have questions or seeking reassurances. Has the CEO been interviewed? Are they any press articles from reputable sources that covered the launch of the company offering the ICO? If it’s a ‘no’ to some or all of the above, then there may be doubt surrounding the legitimacy of the ICO and a pressing need to investigate further.
Have False or Fanciful promises Been Made?
Has the company behind the ICO made bold claims without publishing an economic plan or roadmap to support them?
If it has, then alarm bells should undoubtedly be ringing, and you should do your own objective research to gauge the feasibility of the project.
Always remember, if a project promises to be a game changer but does not have a viable product or proposition, then it is a nothing more than an idea with the mere promise of potential.
Review the Whitepaper
If an ICO promises to disrupt an established industry without providing any technical or operational details in their whitepaper, this again should set alarm bells ringing. Good whitepapers are detailed and should include data charts, calculations, specifications, and even code at times.
Evaluating crypto and blockchain companies can be done in a similar way to how a venture capitalist would assess an investment. Here are a few things that we look for when reading a whitepaper:
- Will the company’s main product be useful?
- What problem will the company solve?
- Do they have a great vision for their company and for their products in the market?
- Will the business model deliver profit and sustain long-term growth?
- Is the product and the technology truly great?
- Does the project have traction in terms of product readiness, users, community, and revenue?
- Who are their competitors?
- Is there a high quality of advisors on-board?
- Is there a product roadmap, and how close is it to fruition?
- Will their current and desired levels of funding realistically allow them to execute their vision?
- Do the tokenomics make sense?
Be sure to keep these considerations in mind and try to come away with a clear understanding of the ICO in question, and whethser the underlying product is a cryptocurrency, a privacy coin, a stablecoin, to be used for fast payments or just a storage of value? The more drilled down the categorisation is, the easier it is to understand the proposition and evaluate it accordingly.
Last but not least, longevity is one of the key factors that you will want to consider when reading a white paper. Ask yourself “Will the product and company have a good chance of succeeding over time in this space?”, as the answer will offer an insight into how viable the proposition actually is.
The Final word
As with all types of investment, you may be able to make money by investing in ICOs and the products that underpin them.
There are also considerable risks involved, however, and you should try to replicate the due diligence that a traditional investor would undertake before committing cash to a new project.
This will help you to make an informed decision and avoid the type of scam ICOs that plague the market.
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