How to Avoid ICO Scams

Initial Coin Offerings, termed ICOs by the cryptocurrency community, are a new way for retail investors to participate in the blockchain-based companies they support, and for the young industry’s startups to find funding despite scrutiny from traditional VC firms and banks. New blockchain ventures can raise working capital by minting their own tokens based on more liquid currencies like Ethereum, and those who purchase these tokens can use them to engage in these companies’ services and speculate on their relative value. This mutually-beneficial relationship gives credit to the parabolic rise of the ICO trend, but even so, its increasing popularity throws up red flags as often as it produces winning ideas.

To avoid falling for an ICO scam, there are clear indications of danger that you can look for to minimize risk. Below are some of the ways that savvy ICO investors identify these hazard and steer clear of them.

Do Your Own Due Diligence

Doing your homework will help you protect the portions of your portfolio that you’ve earmarked for ICO investment. There are several components of a quality ICO that will help distinguish it from a scam or projects with no inertia. Start by looking at a company’s promotional and informational materials.

Thoroughly break down their website and its various assets:

• prototype or sample product
• white paper
• clear road map
• the team, advisors and board

This is the bare minimum—any project without these components is unlikely to succeed.

Read the White paper

To get a deeper understanding of an ICO’s value proposition, the white paper is your best bet. This may seem like a chore, but a long, thorough white paper is a great indication of its potential. Companies that can’t clearly explain their product’s functionality, or who use tech jargon to hide a weak service, are not worth your dollars or time.

Look for a working prototype

If you’re familiar with computer code, many times you’ll be able to see a product’s inner workings yourself. Most companies post their data repositories on sites like GitHub, and seeing if their code works can tell you if you should invest in them.

Does it Solve a Problem?

A major issue with many ambitious ICOs is that they don’t solve any real need. Investing in a project that looks cool might feel great, but unless it fits a real market, an ICO is unlikely to achieve sustainability.

Even if you’re careful and invest in the most transparent ICOs, there is always a risk of being duped by a scam. While sometimes they may not be a company’s fault, they still affect users heavily.

Fake Wallets and Email Addresses.

One increasingly popular way to scam users is to provide fake wallet and email addresses, so when an investor deposits money, the coins simply disappear.

Always verify wallets and addresses before investing.

Phishing Websites.

You should always be on the lookout for websites that look off. Phishers will often create facsimiles of popular ICO pages with a similar URL, luring potential investors into attacks. Verify the use of HTTPS and the correct URL for any ICO on websites that list ongoing offerings.

Pre-ICO company Enigma, for example, had its mailing list and user data compromised by hackers, who made away with nearly $500,000 of users’ Ether. All it took was a compromised password, and Enigma’s users paid the price dearly.

Confido, another supposed blockchain startup, was a scam pretending to be real. The company had an exciting token launch, but quickly raised alarms when its founders snuck off with nearly $375,000. Measuring the intent behind any project’s ICO is difficult, but becomes much more feasible by thoroughly studying the team’s background and their ongoing progress. Make sure to do your homework as well, and remember not to surrender to the fear of missing out.