7 Ways to Spot and Avoid Crypto ICO Scams

By Anush Jafer
9 Min Read

Despite the current market slump, societal adoption of cryptocurrencies and their acceptance by investors and institutions are growing. As a result, the ecosystem receives a massive influx of capital that benefits profitable start-up cryptocurrency businesses through Initial Coin Offerings (ICOs).

While crypto ICOs are an innovative method of financing capital through cryptocurrencies, many nefarious projects have taken advantage of the appeal of investing in promising initiatives in their infancy with the potential for astounding returns as a ruse to prey on uninformed investors.

Understanding Initial Coin Offerings (ICOs) 

Mastercoin hosted the first ICO in July 2013. Then, in 2014, Ethereum raised funds of about 31,000 BTC or roughly $18.3 million at the time. ICOs began to gain popularity in 2017. A glance at the ICO calendar on CoinMarketCap exemplifies the growth of this funding method.

ICOs are a method for a cryptocurrency project looking to raise capital before its launch. Projects or companies looking to create a new coin, app, or service can raise funds through an ICO. In this sense, ICOs are the crypto equivalent of an Initial Public Offering (IPO) or reward-based crowdfunding that many traditional businesses use to raise capital. The difference is that an ICO, often referred to as token sales, uses cryptocurrency tokens issued by the company or project instead of shares of a company sold to investors during an IPO.

Investors looking to participate in a project’s ICO campaign will need to purchase some of the project’s tokens. This is done through fiat currency or an established cryptocurrency, usually Bitcoin. 

Similar to an IPO with a company’s shares, the main attraction of an ICO is the expectation that the project’s success after launch will result in a significant increase in the value of the tokens bought during the ICO.

The risks of an ICO

However, the possibility of large profits also results in a market populated with scammers. Since ICOs remain largely unregulated, they are inherently vulnerable to scams. Fraudulent projects could use the promises of high returns through a token sale to dupe their investors. 

Apart from minimal bureaucracy, scammers benefit because tokens are created and distributed quickly with little technical know-how. Furthermore, due to the regulatory ambiguity surrounding cryptocurrencies, anyone with access to the necessary technology can launch a new cryptocurrency and, subsequently, their own ICO. 

 

News regarding crypto ICO scams came to light in 2018 after research published that approximately 80% of all ICOs in 2017 were scam projects. Ifan and Pincoin, Plexcoin, and Centra Tech are some of the largest ICO scams to have taken place to date. These large-scale scams brought the topic of ICO regulation to the spotlight. Different countries govern initial coin offerings in various ways, from outright bans to regulations in the works to published guidelines governing ICOs.

Types of ICO scams 

  • Exit scams: This is a common type of crypto ICO scam that involves a fraudulent operation organized by unscrupulous cryptocurrency promoters who collect investor funds for an ICO and then abruptly vanish without providing investors with any information. 
  • Phishing scams: Another common tactic is to create fake ICO-like websites and direct investors to deposit money into a compromised cryptocurrency wallet.
  • Ponzi schemes: Scammers often use ICOs to build crypto Ponzi schemes. Investors are convinced that what they buy has value in this case, but any returns come from the capital invested by other people, not from the investment itself. Therefore, rather than participating in any legitimate investment activity, the dishonest actors concentrate on bringing in new funding to fulfill their obligations to previous investors and use a portion of the invested funds for their benefit.
  • Pump and dump scams: A pump-and-dump strategy involves a scammer using misleading information to artificially raise the price of a token to eventually sell the token at a higher price previously purchased for a low price. 

Warning signs of a crypto ICO scam

When investing in an ICO, there is no guarantee that the investor will not be the victim of a scam. As a result, when investing in ICOs, investors must exercise extreme caution and diligence. The following are some indicators of a potentially fabricated and fraudulent ICO.

1. Poorly written whitepaper or website

A crypto project’s whitepaper lays out the context, objectives, approach, issues, financial models, and schedule for implementation. Typically, a project will introduce the whitepaper and point potential investors to a website that details the project. The first impression of a white paper and a project’s website is significant. Additionally, it is crucial to thoroughly check a whitepaper and website for plagiarised material or poor grammar. 

2. A heightened sense of urgency

A common psychological weakness that ICO scammers take advantage of is FOMO or the fear of missing out. Therefore, approach any projects that fervently urge people to invest in their ICOs with extreme caution.

3. The lack of identifiable team members or developers

Most legitimate crypto ICOs provide full transparency about the details of the team behind the project. Valid ICOs frequently offer a means for investors to communicate with the team directly and ask questions about the project. On the other hand, fraudulent cryptocurrency projects frequently omit or keep team member information vague to avoid being investigated or held accountable. 

4. Non-existent roadmap

A reliable project frequently has a detailed, understandable chronological roadmap of its financial objectives and projected expansion. If this is absent, it is a major red flag that the ICO issuers only intend to turn a quick profit before abandoning the project. 

5. Unclear financial goals

Crypto projects looking to raise capital to launch their growth typically clearly state how much money is needed to accomplish their objectives. If this information is missing on the white paper or website, there is a very high likelihood that the project is a fraudulent endeavor.

6. Marketing pyramid structures

If the ICO has marketing material depicting a pyramid with multiple levels, incentivizing people to bring new buyers, this could be a blatant sign of a Ponzi scheme. 

7. Flawed tokenomics

If a sizable portion of the pre-mined tokens are in the hands of the project team members, this is another indication of a potentially fraudulent ICO. Therefore, before investing in any project, getting well-versed in its token distribution is crucial. 

Closing thoughts 

ICOs offer fantastic opportunities for both projects and investors. Projects can generate capital quickly and cost-effectively while investors benefit from the potential for extremely lucrative returns. 

However, the nascency of this form of funding in an industry that is still subject to regulatory ambiguity allows malicious actors to use ICOs as a facade to attack unsuspecting victims. 

Therefore, investors looking to speculate and hedge their bets early on the next revolutionary crypto project while remaining safe must consider these red flags.