How to Spot a Scam ICO
The crypto market is can be intimidating, not only due to the volatility and technical hurdles but also because of the sheer volume of young and upcoming ICOs. These ICOs often promote themselves as “the next Bitcoin” or otherwise imply that vast riches are just around the corner, if only you were to invest some of your hard-earned money into the project. Unfortunately, the ease of starting a company and the lack of regulations in crypto have left the doors wide open for scammers to prey on people’s greed (or desperation), raising millions of dollars to fund a project that they never intend to work on. There are companies out there with millions, if not billions, in market cap, and no product — and when their value inevitably crashes, it’s the individual investors who are left holding the empty bags. Unfortunately, the occasional ICO can produce huge profits and a legitimate, useful product, which keeps the money pouring in. The question is, in such a fast-paced, global, quasi-anonymous environment, how can anyone know which ICOs are built in good faith, and which are likely to be scams? While there’s no perfect formula, there are some things to look out for, and we’ve compiled a few of the most reliable indicators here.
1. Unlimited Token Supply
This is first because it’s the one nobody thinks about…. Until they do, and then it’s terrifying. Imagine if there was a “diamond team”, who could just build more diamonds anytime they wanted. Except instead of having to build them, they just change a few lines of code and millions more diamonds can just exist. Immediately. Inside their bank vaults. Yeah, I think that’s a pass. And yet, this is exactly what we’re dealing with when tokens don’t limit their supply with a hard, encoded cap. The developers have every incentive to print more tokens when the price is high and sell them, securing a nice profit while simultaneously crashing the market. Be very wary of these projects.
2. Plagiarism
Occasionally, plagiarism happens. It happens whenever I have to tell my nephew a bedtime story, and one day he’s going to realize that I just keep feeding him little plot nuggets from Star Wars. It happens when programmers don’t want to re-build something that’s been built one million times. It happens every time Robin Thicke writes a song, apparently. There are only so many ways to phrase a concept, and a lot of whitepapers use similar terminology and buzzwords. Some overlap is to be expected, but if most of a website or whitepaper is pulled directly from another project, it’s a huge red flag. It means the team was either too lazy or unable to even attempt their own paper, and this is not a team that’s building for the long term.
3. Imbalanced Token Distribution
Another indicator that the team’s primary motive is pure profit is the token distribution. If the team gives themselves the majority of the coins, not only is the project de facto centralized, but the people who control the project have the ability to retire as soon as things start getting a little traction. At this point, “best practice” seems to be expecting the founding team to retain and split about 20–30% of the tokens… enough to keep them working hard to drive the price up, but not so much that they can control the platform. This information can be hard to find, but when it’s available, it’s typically listed on their ICO page, or less frequently in their whitepaper. If you can’t find it in a reasonable place, and some good digging doesn’t turn anything up, this may be a sign.
4. Pump and Dump History
Pumps and Dumps are great for the people who orchestrate it, and terrible for everyone else. Side note: joining a PnD telegram group does not make you an ‘orchestrator’. Unless you have millions in liquid cash, and a few similarly-situated friends, and y’all started the PnD telegram group that now has a few thousand members… you’re “everyone else”. Now, this is kind of a ‘soft’ flag. Some tokens fall victim to PnD schemes through no fault of their own. However, it’s important to keep an eye on the pattern of suspicious activity. A coin with several pumps on no news, followed by a dump, is likely just a tool for the founders. Similarly, a token with even one recent PnD, even if it was due to an external group, means that the volume just isn’t high enough (yet) to protect it from manipulation. The only way I’d feel safe holding a coin with a PnD in its history is if it was only once, and a long time ago at much lower volume.
5. Poorly-Written Whitepaper
Or website, or blog posts. Or anything, really. This is an industry where even teams with an extreme eye for detail can lose hundreds of millions of dollars to hackers. Now, if legit projects full of rockstars can barely protect your money, are you really going to trust some dev team from another country who can’t spell the word “protocol”? I’m not. Of course, there are exceptions. Some whitepapers are human-translated such that the team can’t check quality, and some websites are run through translating algorithms, which can produce some odd results on occasion. Common sense will be key here, but as a general rule, if a company can’t be bothered to proofread in their native language, stay away. And double stay away if they spell it “Etherium”…. I wish I was joking.
6. Guaranteed Profits
This one is bad…. really bad. Like, I don’t even know where to start bad. First, in America, at least, this token is a security and is probably already on the SEC’s radar. Second, any token that is guaranteeing profits is lying. You just… can’t guarantee that. Third, this shows what’s at the heart of the operation. The projects that last will be the ones that actually build things, not the ones that manage to rake in the most ICO money. What’s especially fascinating about these ICOs is the fact that everyone seems to agree, right off the bat, that they’re not entirely legitimate and will almost definitely crash. People buy in not out of belief, but because they plan to ride the wave up, sell at the top, and cash out big. Don’t be that person. If you’re relying on finding a greater fool, you will ride the wave up, and then back down, because you are likely someone else’s greater fool.
7. Anonymous Team
There are good ways to stay anonymous, and bad ways to stay anonymous. I fully support everyone’s right to anonymously build a blockchain from scratch and start a coin, following Satoshi’s example. The value is nothing, and it’s a gamble on one’s self — in most cases, nothing will come of this project. But the height of entitlement is asking for actual value in the form of proven tokens that are easily exchangeable for fiat while simultaneously remaining unknown (i.e. "I'm anonymous, but please send me Bitcoins"). In most cases, this is because there is no intention to actually build what was promised, and the anonymity is a defense against a lawsuit or other retribution. A good way to think about it is understanding that projects can be developed independently and anonymously, but if they’re asking for money, you have a right to know who you’re giving money to.
8. No Roadmap
If they don’t know what they’re doing and don’t have a plan, why do they need your money? I mean, you can still buy in, but if you’re going to do that, you should also consider sending me some Ether. I have exactly as much of a roadmap, and probably as much of a plan. And who knows, maybe I’ll build something someday.
9. Celebrity Endorsements
I’m not saying that Floyd Mayweather isn’t a programming genius. And maybe Paris Hilton is actually a pretty solid cryptographer, I can’t say for sure. But, if pressed, I suspect that these (and similar) celebrity endorsements are much closer to a paid pump scheme than a genuine signal about the quality of any given project. And again, this is an important clue about the company’s priorities. Wealth is a zero-sum game, and the more of it that is going to celebs and the founders, the less there is for you. By the time you hear about an endorsement, the profits have been taken, and you’re too late. Crypto is 95% hype right now, and companies who promote this way are proving their willingness to leverage it. I’d be extremely wary of any project with no working product and no real roadmap, but somehow has a hot new rapper talking about how their ICO will make everyone rich. The one exception might be Art Garfunkel, or anyone else with an advanced degree in a relevant field.
10. No Clear Use Case
The recent bull market provided a catalyst (and the capital) for a lot of ICOs to launch. Most of these tokens will disappear within a few years, leaving a lot of people with a lot of worthless digital tokens. Unfortunately, a lot of these companies will fall off the face of the earth because they shouldn’t even exist in the first place — or, more accurately, they should be allowed to exist, but should be valued at exactly $0. Imagine if someone called you up and said, “hello, I’m starting a company. Please give me money in exchange for shares”. You’d probably either hang up, or, if you’re in a particularly good mood, you might ask, “Well, what does your company do?”. If the answer is “uh… well… we call people and ask them to buy shares”, you’d laugh, and laugh. But that’s essentially what a lot of these token projects do. If they don’t have a clear use case, you’re buying empty shares in the hopes that someone else will buy them from you later. Good luck. P.S. this is a pyramid scheme, so.
11. Poor Financial Practices
You won’t always know the inner workings of most companies, but some externalities during the ICO stage will give you a few signals. Perhaps the biggest indicator of trustworthiness is how they handle their ICO funds. Are the funds sent to an escrow service, preferably one that releases the money to the company at predefined benchmarks? If not, you’re essentially just sending money to the founder’s wallet. This is pretty unacceptable, and shows either a lack of awareness about best practices or just pure bad faith. Remember, these companies are asking for your money, and they could be run by anyone from any country in the world. Make sure you money is, above all, safe, and only being used for what was promised. Anything else just makes you a victim.
12. Your Gut
You likely have an intuitive sense of whether a project is trustworthy or not — the hard part is listening to your instincts. The adage “if it’s too good to be true, it probably is” has been proven reliable time and time again, usually, for some reason, in hindsight. Don’t fall prey to the fear of missing out, and don’t buy into the hype. Do your research, get informed, and accept the realities of the market. This is a volatile, highly speculative space, and comes with enormous risk. The entire system could completely crash and burn at any time, and this should shock nobody. If you must invest, do so wisely, an in projects you believe in. Most people won’t get rich off the latest ICO, and are much more likely to lose everything than ever turn a profit. Don’t forget to keep in mind that there is no perfect system for weeding out all the scams… all anyone can do is watch out for red flags, and then make an informed decision based on the evidence taken in context. Remember to stay safe out there, and happy researching!
-VEVA team
http://www.veva.one