I’ve seen a lot of people recently getting burned by ICO’s (myself included) and thought I would write my first extended post on some of the things I’ve noticed which point to an ICO being a scam in one way or another, as opposed to projects which achieve high levels of transparency and legitimacy.
My 4 biggest warning signs are below – please join the conversation and let me know what you think of these warning signs in the comments section! Thank you for reading.
Warning Sign 1:
The site looks great and the idea is solid – but you notice that the founding team has not provided any information on who they are and why their background that makes them a suitable team for taking your hard earned crypto. This warning sign grows if a percentage of tokens are reserved for the founding team – especially if the team receives those tokens during the ICO and has the opportunity to cash out right when the token is listed.
Examples of transparent teams include Aragon (ANT) and AirSwap, which has their entire team bio’d on their site 3 days before the ICO begins on 10/10/17. An example of a team with no transparency is current WAVES platform ICO Fupoofcoin.
Warning Sign 2:
This one came to me slowly after looking at what feels like hundreds of ICO’s over the past few months. The warning sign here is what I’ll call ‘Inherent bias’ in the ICO marketing materials and website. Inherent bias can be subtle or blatant, and usually is meant to draw investors away from the fact that a coin has minimal intrinsic value. It shows up in many variations of the phrase “Make money from ‘x’ coin,” and can also show up as “Our coin is based on (insert successful project here), which made investors 1000%.” These statements play to those who missed out on the initial bitcoin surge and are willing to invest in new projects based entirely on FOMO. ICO’s without Inherent Bias propping up their material are much more likely to base their value on the product they are offering and therefore are more likely to succeed in real value creation over the long term.
Warning Sign 3:
Does the ICO result in a crypto with durability, transportability, non-counterfeitability, and supply constraint to keep inflation low? Remember that a Currency must have:
- Durability: it retains the same form over time and retain some form of value over time (more on that in a minute)
- Divisibility: The US Dollar is divisible down to the penny. Cryptocurrency is divisible down to 8 decimals where .00000001 BTC is called 1 Satoshi.
- Transportability: How easily can the token cross borders, and at what cost? Is there an easy way for you to complete a transaction, at low cost?
- Non-counterfeitability: How easy is it to forge the currency? Well, while forging the US dollar seems a relatively difficult task, creating counterfeit crypto should also be just as difficult. In the case of Bitcoin you would have to get 51% of all 10,000 globally dispersed node operators to recognize your fake transaction. This is where true decentralization becomes so important.
- Supply Constraint: This one is a bit subjective. The truth is one of the things that gives currency its value is its inflation or deflation rate. This is a big watch point when researching a project. How many coins are there in the market today? How are new coins mined or forged? How quickly is that happening? A high inflation rate can be counteracted by a fixed supply, like in the case of Bitcoin. There will only ever be 21 million Bitcoins. Once the last Bitcoin is generated node operators will no longer be rewarded with block rewards. They will exclusively earn the fees from the transactions they process. If you find a project with no fixed supply, while that isn’t the kiss of death for the project, it’s something to keep an eye on. Mass adoption of that project could result in a flood of currency into the market causing rapid devaluation.
Warning Sign 4:
Development time frame: has the underlying technology been in development for an extended period of time prior to ICO? If there has been no period of building the technology and business before the ICO funding round, it points to a team that hopes they can deliver on their roadmap instead of a team who has actually planned how to deliver on their stated roadmap for the project post ICO (should be at least 3 years roadmap provided, with the roadmap beginning at least 6 months prior to the ICO).
Good luck on your ICO investing!