6 Signs of an ICO Scam (And How to Avoid It)
- What is an Initial Coin Offering (ICO)?
- Risks Associated With ICOs
- 6 Signs that an ICO May Be a Scam
- Avoiding Scams in ICO Affiliate Marketing
Cryptocurrencies have attracted a lot of attention over the last year due to the spectacular rise in the price of Bitcoin.
The price of Bitcoin has increased dramatically, from around $1,000 in January of 2017, to over $17,000 in December of that year.
Alternative cryptocurrencies like Ether, Ripple and Litecoin have followed suit, leading to a surge in interest around Initial Coin Offerings (ICOs).
What’s an ICO all about?
What is an Initial Coin Offering (ICO)?
An ICO is an unregulated way to raise capital for a start-up cryptocurrency venture, similar to crowdfunding.
The fact that ICO backers do not donate funds and expect a return on their investment.
It is used to bypass the rigorous and regulated fund raising process imposed by banks and venture capitalists.
ICOs are similar to Initial Public Offerings (IPOs) that are issued by new companies to raise capital in return for shares.
The difference is that an ICO uses tokens, or virtual coins, instead of shares in exchange for capital.
In ICO campaigns, a portion of the cryptocurrency is sold to backers of a project in exchange for traditional currency or an established cryptocurrency, usually Bitcoin.
In order to launch a campaign, a company creates a white paper outlining the scope of the project, how much capital is needed for the venture, the type of currency accepted, and the duration of the ICO campaign.
While IPOs deal with investors, ICOs encourage funding from supporters of the start-up’s venture.
Risks Associated With ICOs
ICOs are inherently risky because they are not regulated, making them vulnerable to fraud.
Scammers offering an ICO will attempt to drive the price of the cryptocurrency up to a particular point, at which they will sell their entire interest.
This will lead to backers who hold coins from ICO seeing a dramatic decrease in value, with a subsequent loss in investment.
The risks associated with ICOs have led to some governments considering the regulation of this sector.
In many countries around the world, ICOs are entirely illegal.
World Crypto Index reports that, in September 2017, China banned trade in cryptocurrencies for its residents while making the use of ICOs for fundraising a prosecutable offense.
The volatility in the cryptocurrency market could also see other countries, such as the United States, taking action to regulate cryptocurrency trading and the use of ICOs.
That being said, ICOs are still being used to generate capital for start-ups and hundreds of millions of dollars are being raised through these channels every month.
In order to mitigate the risk, investors should learn to recognize the signs of an ICO scam.
6 Signs that an ICO May Be a Scam
There are several signs that investors should look out for to determine whether an ICO might be a scam.
Check the signs now!
1. Weak Website or White Paper
When launching an ICO campaign, a company will normally issue a white paper and direct potential investors to a website outlining their project.
Legitimate startups will explain why people should invest in the project and its potential value.
Investors need to do extensive research on the company to avoid scams.
Thoroughly analyze the white paper or website in search of fake information or statements.
Check the credentials of current investors who may be used to encourage further investment.
Scammers may fail to publish a white paper or website to market their ICO.
If a white paper or website is weak and unconvincing, or entirely absent, it’s best to steer clear of such an ICO.
2. Absence of Named Developers or Team Members
A valid white paper should give the details of the team behind the venture to help give credibility to the project and develop trust.
Individual team members and developers should be researched to determine whether or not they are legitimate.
Valid ICOs often provide a channel for investors to communicate directly with a team member to learn more about the offering.
Scammers will want to avoid being held accountable and will avoid naming anyone associated with their ICO.
If a white paper or website does not include the names of developers or team members, it’s likely to be a scam.
3. No Clear Roadmap
Legitimate ICOs should provide potential investors with a detailed chronological outline of development and funding goals.
They should also give some indication of how the company sees the development of future growth.
If this is lacking, that’s a sign that the people behind the ICO are just planning to make a quick profit before folding the venture.
4. Skewed Mining Structure
Another warning sign is if the ICO team reserves a significant amount of pre-mined tokens for themselves.
This could be a sure sign that the project is driven by short-term financial gain.
A project’s distribution schedule of tokens can be an indication of the team’s intent.
Pre-mining generates tokens for a small group of individuals before the sale of tokens goes public.
This is often done to reward developers and early investors, but later investors should be concerned if the number of pre-mined tokens is disproportionately high.
This could indicate that the motivation for the ICO is short-term financial gain for the team members.
5. Uncapped Fundraising Goal
ICOs are usually created with the goal of raising a set amount of capital to fund a project and launch its growth.
A legitimate company will state this goal in their white paper or on their website.
If an ICO is launched with no specific funding goal, it could be a sign that the aim of the ICO is not legitimate and may be used to scam investors.
6. Evidence of a Pyramid Structure
If an ICO has a structure with multiple tiers that encourages people to bring in new investors for reward, it’s likely that this is a pyramid or Ponzi scheme.
Evidence of such a structure should be a clear warning not to invest.
These types of schemes usually collapse when the number of new investors drops off substantially and current investors stop getting paid.
Avoiding Scams in ICO Affiliate Marketing
For many startups, affiliate marketing is a viable way of generating revenue faster.
It has a number of benefits:
- Affiliate marketing helps a company reach new customer bases
- It brings in a larger volume of web traffic
- It builds beneficial relationships with high-volume affiliates for future business development
However, affiliate marketers need to be aware of ICO scams that could destroy their credibility and cause immeasurable damage to their affiliate network.
They need to conduct due diligence on ICO startups.
Because, unlike single investors, affiliate marketers have a responsibility to minimize the risk of investment for every investor within their network.
If used legitimately, ICOs can be a quick and cost-effective way of generating startup capital.
This could help companies to grow faster and generate significant returns for investors.
Investors and affiliate marketers need to weigh up the risk associated with ICOs against the prospect of making returns faster than with stocks.
The associated risks with investing in ICOs may exclude investors who can’t afford to sustain losses.
However, ICOs can be highly profitable investments if investors and affiliate marketers do their homework and heed these signs of scams.
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