TOP > ICO > Opinion: ICO Red Flags | How To Spot ICO Scams
July 31, 2018 Updated

There are clear indicators whether the ICO is doomed to fail or if the project will run with your money. Read on to find out.



This is a guest contribution by Mr. Steve Kaaru, a freelance tech and cryptocurrency writer. The views and opinions expressed by the author in this article do not necessarily state or reflect those of the website. 

ICOs are becoming the new fundraising model of choice for many startups. Their benefits are many and they are easy to organize, raising millions in minutes and in some unique cases, even seconds. However, they have also become a fertile ground for fraudsters. Many have fallen prey to ICO scams which seem to be increasing by the day. The ICO field is largely unregulated, worsening the situation as it becomes nearly impossible to claim one’s money once one participates in an ICO.

ICO Scams

In December last year, the Securities and Exchange Commission in the US froze the account of PlexCoin, a blockchain startup whose fraudulent ICO had raised $15 million. The founder, Dominic Lacroix was found to have presented false information to investors about the returns to expect and to have covered up his criminal past. Lacroix was arrested and jailed and much of the money was recovered in cryptocurrency wallets. This was just a case of a few lucky investors who got their money back. Many have lost their money with fraudulent ICOs such as Benebits, Opair,3 and Ebitz and AriseBank.

Is there a way you can protect yourself from ICO scams?

ICO Red Flags

While recognizing a scam may not always be easy, there are some shared characteristics of ICO scams that one can identify them with. These red flags are important to know beforehand as they can save you from losing your hard-earned money. They include:

1. Scanty whitepaper

In the cryptocurrency and blockchain industry, a whitepaper is one of the most crucial documents. A whitepaper is a document, usually embedded on the startup’s website, which details how the company will operate and the technology behind it. A scanty whitepaper that doesn’t get into the details or generalizes the concepts is the first red flag. A whitepaper must be very detailed, from the solution being solved, how it’s being solved, the token distribution model and the administration protocol. The website should also contain sufficient information about the company and especially its founders and their prior experience in the industry.

2. No open-source code

Most blockchain projects are open-source. This means that their code is publicly available and is usually hosted on GitHub. This makes the project transparent as anyone that’s interested can examine the code and find out if it’s viable. If a startup is holding an ICO yet its GitHub repository is empty, beware. Many ICO scams historically have been quite secretive about their code and have avoided sharing it publicly as participants with programming experience would have known they were scams.

3. Unknown team

Some of the greatest developments in the blockchain industry have been led by people with no experience such as Ethereum founder, Vitalik Buterin. However, a whole team leading a startup, none of who has any recognizable experience in the industry is a red flag. A startup holding an ICO should have some of the people with experience in the blockchain industry and this should be well documented on their website. ICO scams are usually by startups that withhold information about their founders or which provide questionable sources. These types of ICOs must be avoided or you run the risk of losing your investment.

4. No problem solved

Ethereum was the pioneer of smart contracts; IOTA pioneered the decentralization of the Internet of Things and the first data marketplace while TRON introduced the world to the first decentralized content sharing platform where users are fully in charge of who accesses their content and the cost for it. All these are cases of startups using the blockchain to solve real-life problems. The startups mentioned have gone on to command billions of dollars in market value derived from people’s confidence that the startup can last the long haul and that any investment into these startups will appreciate in value. A startup that doesn’t add any real value to society or one that seeks to implement the blockchain in an industry that doesn’t really need it is likely to fail. The whitepaper is the best way to determine this and if the details on the problem being solved are scanty, avoid investing in the ICO as it is likely to be fraudulent.

There is no full proof way to determine the validity of an ICO and whether or not it’s a scam. However, using these pointers, one is better positioned to judge an ICO and determine whether it’s likely to be a scam or if it has the potential to change the world.

Source: TechCrunch

About the Author:

Steve Kaaru is a technology writer with an extensive knowledge of cryptocurrencies and the blockchain technology. You can get in touch with him on Twitter at https://twitter.com/Kaaru254

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