Smart Investors Guide To Detect Fake Initial Coin Offerings (ICOs) & Fake Token Sales
What are ICOs and Token Sales?
ICO or the Initial Coin Offering can be defined as follows –
“An ICO is an unregulated means by which funds are raised for a new cryptocurrency venture.”
Basically an Initial Coin Offering (ICO) is used by start-ups to bypass the rigorous as well as regulated capital-raising process required by venture capitalists or banks.
Whereas, a Token Sale can be defined as follows –
“A Token sale is a limited period of sale of a pre-defined number of crypto tokens to the public, typically in exchange for major cryptocurrencies such as Bitcoin and Ether.”
What are the challenges faced by ICOs and Token Sales?
Surely, both ICOs, as well as Token Sales, have brought a lot of knowledge and profit to the start-up companies and also for established companies.
With these, anyone with an interesting idea, belonging to any part of the world, would be able to find the required capital in order to start their company.
But both have their challenges as well and among all the challenges, one of its main concern is about regulation.
Since ICOs, as well as Token Sales, are usually based on the blockchain technology, so the process of regulation over them is difficult. Due to this, the regulation is less and as a result, this would tend to attract more and more bad specimens to the ecosystem.
ICOs and Token sales have also been prone to ‘faking’. That is, there are many instances where fake ICOs as well as fake token sales are being produced. Do to these fake ICOs and token sales, the investors are facing a tremendous loss.
Few examples of such fake ICOs and token sales are mentioned below –
There are many such fake ICOs and token sales which have been mentioned in a huge list and among them another major fake ICO is known as CoinDash. The website was hacked just after it was launched and the original ETH deposit address was immediately tampered. Even though the anonymous attackers had returned the original ETH back to the company, yet the legitimacy of the website was at stake.
How to Identify the Fake ICOs and Fake Token Sales?
Since we had mentioned about the various fake ICOs and token sales, it is obvious for you to avoid them. These fraudulent cases are not that uncommon in the crypto world hence one must be well informed before investing, so here are seven ways to identify the various fake ICOs and token sales.
- Compare Whitepapers – Recently we had mentioned about the whitepaper proposed by the TRON project which was in the news for being a copied whitepaper. TRON’s co-founder, Justin Sun, gave certain reasons and blamed the language translation. But he did produce a new whitepaper later.
Similarly there are many whitepapers out there for each project. So it must be your duty to compare the whitepapers and execute the copied ones.
In case you are not able to find a whitepaper for a certain ICO or token sale, or if the whitepaper doesn’t seem to be proper, then don’t even bother referring that particular project.
Fake ICOs or token sales tend to have a copied whitepaper most of the time. Hence, make sure to do your research
- Wrong or NO Team Details – Just as we had mentioned a compulsion on the whitepaper, similarly this point must also be a compulsion.
The team details of the project that you are planning on investing must be public to all. If the ICO or token sale tends to hide this fact from you saying they like to be anonymous, then don not even try to look further as that could very well be a scam.
Also, at times, even if the ICO or token sales provide you with the details, they tend to be wrong or fake. One such incident was the Benebit ICO team. The fraudulent case was pin-pointed but it was already too late since few investors had already spent without researching further.
Hence, make sure to have a thorough check up on the team details on various social media sites such as Facebook or LinkedIn. You could also have a random search on Google by typing out the team member’s name along with the word “SCAM” or “Fraud”. This could help you with a lot of information of previous as well as current scam regarding the person.
- Absence of Minimal Viable Product (MVP) – Another main criteria that you need to look out for is the Minimal Viable Product or the MVP. This MVP could be available in the Beta as per the whitepaper provided.
MVP gives you a practical way in which you could see and feel the product that you are planning on investing. And this MVP is often skipped by many investors.
Few ICOs such as the Filecoin didn’t bother producing a MVP and yet they are quite successful as well as look promising for the future. But wouldn’t be the case at all times, hence there is indeed a need to look out for the product’s MVP if you want to escape the losses.
- Absence of Roadmaps – Just as any company or even human beings for that matter, having a roadmap about the goal that you want to achieve is of utmost importance.
If the ICO or token sale doesn’t show a roadmap then as expected just ignore such a project. Also, is some cases, they tend to provide a Roadmap but if you compare it with their whitepaper, then you would realise it isn’t matching or it isn’t feasible according to their capabilities.
Hence, this could mean that they are indeed fake and just want to make profit for a short duration of time.
A good way to check about a given roadmap is to compare with other similar companies of that particular field and analyse their time lines.
- Interaction and Questions – It is almost mandatory for an ICO or a token sale to form a group such as Telegram, or Slack, etc. as soon as they start their marketing attempts.
Such groups could turn out to be a great opportunity to learn about the team.
Also, while you are at your interaction with the team, you must also ask reasonable and important questions to them.
If they ignore your question or ban you from the group due to your questions, then such an ICO is indeed a fake one.
Also, if they answer your question but tend to show a level of urgency then once again such an ICO is considered fake.
Thus in order to understand the company, do your research and ask all that is necessary. Sometimes it is even allowable for you to pretend, if you really have to.
- Ponzi scheme – It is basically a fraud scheme wherein the victim is tricked into investing in a company that is either bad in business or doesn’t, in fact, do business. This Ponzi scheme tends to only generate a Return of Investment or (ROI) which basically means it attracts more investors. And once it stops to attract investors then the scheme would be considered dead.
It is indeed difficult to track a Ponzi scheme but you just need to be a bit smarter than the ones who run such a scheme.
A simple way to find out if an ICO runs on a Ponzi scheme or a pyramid structure, is to know if the ICO or token sale is asking you to refer a friend, relative, etc. as an investor. If it does, then such an ICO is definitely fake.
This is mainly because referrals mean new investors and new investors mean profit which further means it’s working as a Ponzi scheme. Also, if they tend to pay you for your referral then it is nothing but a fraudulent case, hence realize it and stay away from such ICOs or token sales.
- Research over the Token Economics – Token Economics is an important factor to be considered for all ICOs and Token sales. The Token economics must be clear and well understood.
If it isn’t clear then it could indeed be suspicious so in such cases, once again start with your reasonable questionnaire. If you get valid answers from the team then well and good.
But if they fail to answer you properly or if they tend to hide certain facts and figures by saying that certain percentage of the funds have been kept for some anonymous use. Well, then they are indeed questionable and unreliable.
Also certain stats must be kept in mind such as the founder’s control not being more than 50 % – 60 % of total supply fund, fixed coin supply, sharing ratio, control of remaining funds, secured multi-sig tech, etc.
Ethereum’s CEO, Vitalik Buterin said, “90 % of token start-ups will fail”.
Hence, it is clear as to why every investor must indeed do their research and avoid to be prey to various fake ICOs or token sales. Hopefully, these tips would help a person to not do the same mistake by believing everything that they see.