Initial Coin
Offering (ICO) is similar to Initial Public Offering (IPO). ICO sells a stake of
the initial crypto launch. But unlike IPO, the project initiator exchange
in-house "tokens" for common cryptocurrencies in an ICO. The tokens might
grow in value after the project is successfully launched. In this way can the
investors get returns. ICO size kept growing in recent years.
Source: Coin
Telegraph
High-risk
ICOs
Like any
investments, there are never promises that the investors will earn money from
an ICO investment, no matter how initiators boast about their projects. In
fact, the price of around 28%
of the survived ICOs fell by more than 80% half a year after ICO date. Besides,
ICO is so new that the regulations are inadequate. 80%
of ICOs conducted in 2017 were scams. In an ICO scam, the developers cheat
investors by “building” a fake project.
Sources: Lei
Feng
Big ICO scams
Project
|
Country
|
Amount
|
Victim
|
Indicator
|
Pincoin
and iFan
|
Vietnam
|
US$660
million
|
32,000
|
Profile
cheating*
|
OneCoin
|
Dubai
|
Multibillion-dollar
|
N/A
|
Ponzi
scheme**
|
Bitconnect
|
The
U.S.
|
US$2.5
billion
|
N/A
|
Ponzi
scheme
|
Plexcoin
|
U.S.
|
US$15
million
|
Thousands
|
Ponzi
scheme
|
Centra
Tech
|
The
U.S.
|
US$32
million
|
N/A
|
Profile
cheating
|
Cabbage
Tech
|
The
U.S.
|
N/A
|
N/A
|
High
return***
|
MIROSKII
|
The
U.S.
|
US$833,000
|
N/A
|
Profile
cheating
|
BTC
Global
|
South
Africa
|
US$80
million
|
28,000
|
Ponzi
scheme
|
*The
profile of team members is fake
**The
U.S. Securities and Exchange Commission (SEC) defines a Ponzi scheme as “an
investment scam that involves the payment of purported returns to existing
investors from funds contributed by new investors.”
***The
developers promised unrealistic high returns
Sources: Coin Telegraph (1,
2),
The
Block Crypto, CCN,
TechCrunch,
CNBC,
Finder,
Bloomberg
Although ICO
investments are of high risk, the investors are tempted by the seemingly “huge
profit return” projects. So how do we identify if an ICO project is a scam or
not? Generally, we need to check these key elements when we are evaluating an
ICO project - risk assessment, technology, white label, and regulation
compliance.
Risk
assessment
We should
assess the risk of a project appropriately before investing. If a project developer
promises that you will get a huge profit from the investment, it is likely that
it would be an ICO scam. No one can know the profit of a project beforehand,
but a fraud can always boast unrealistic returns. The Bitconnect initiators
promised astronomically high returns, only turns out to be a scam.
The credibility
of the development team is essential. MIROSKII
project is a textbook profile cheating ICO scam. The profile of the members
fake. Even the photos of the members are phoney. To tell the truth of a
profile, we can always check LinkedIn. Usually, the developers would claim that
they have participated in some well-known successful projects or cooperated
with big brands. To verify, we can check the release of these projects on the
official website of the big brand. Centra
Tech project developer claimed that they cooperated with Visa so that users
can convert their cryptocurrency to cash. But no such releases can be found in
Visa website. Later Visa denied
this statement. Last but not least, if half of the team members are anonymous,
the team can be suspicious.
Technology
We should
check whether blockchain technology is applied in the ICO project or not. Some
lazy frauds would copy or build a terrible website. For example, OneCoin
website is strewn with typos. The OneCoin project never issued a legitimate
decentralized cryptocurrency. These are obvious indicators that this project
would be a scam. Besides, the codes of the smart contract of an ICO project
should always be published to GitHub. If not, we should be careful about the
genuineness the project.
Regulation
and compliance
Different
countries have different regulations on ICO. For example, China bans
all ICO transactions; the SEC declared
that it would apply Federal Laws to ICO projects; Venezuela
launched
oil-backed Petro tokens, etc. We need to know the regulations well and make sure
the ICO projects that we are going to participate are regulation compliance.
For instance, if an ICO project is based in China, it is definitely illegal.
White
paper
Usually, the
white label of a project describes what the project is, solutions to possible
issues, commercializing solutions, etc. We should always study the white label
of the project carefully before investing. Be sure to raise vigilance if the
white paper is unoriginal or of poor quality,
ICO
investment can be lucrative indeed if we choose the right project. The
suggestion is to wisen up and never easily believe a promise of profit easily. Always
be very clear about the projects you are investing in.