ICO red flags: How to spot scams and junk coins

The number one rule used to be that if it seems too good to be true, then it probably is. However, that rule doesn’t always apply to ICOs.

The most popular cryptocurrencies have years of development behind them, and today’s legitimate and successful ICOs might be aiming to reach maturity years later, with exceptionally ambitious goals.

Consider two real coins that sounded too good to be true. One is legitimate and the other was a scam.

CASE STUDY : 

IOTA vs PlexCoin

IOTA doesn’t use a blockchain. Instead it uses a “directed acyclic graph” network of its own design called a tangle.

Through this, its developers promised to create a cryptocurrency network with:

Zero transaction fees
Infinite scalability for an endless number of users to get instant data transfer
Potential compatibility with almost any device imaginable

It’s an ambitious project that uses buzzwords to make promises that sound too good to be true. But it’s also a legitimate, transparent and viable open-source project, and the value of IOTA tokens has multiplied since the ICO. Its ICO investors are very happy with their decision to buy.

Plexcoin is on the other end of the spectrum. It skipped over all the technical details and instead offered some fairly basic features, most of which already exist. All the details were vague, except its promise of a 1,354% return on investment in the first month.

This alone makes it almost certain that it’s an ICO scam. No legitimate ICO will ever guarantee a return on investment.

Its creators are also anonymous and there are no details of the team behind it. But if there were, they might show that “Plexcorp” was created by a Canadian businessman named Dominic Lacroix who has previously been charged with six counts of fraud.

Despite that, it managed to raise over US$15 million from unsuspecting investors afraid of missing out on the next big thing.

You can still find its website here, although you probably won’t be able to make an investment even if you wanted to. Its accounts have been frozen by the US Security and Exchange Commission (SEC), and its creator charged with illegally profiting from defrauding customers.

Look for signs of a scam and indications that it might not be a very successful investment.

Scam ICO red flags
Empty repositories for open source projects. This is when they claim to be open source, but have no published documentation.
No communication channels. Trust is crucial for an ICO, and a legitimate one should be ready to earn it by being easy to contact.
An unknown team. An anonymous team that doesn’t provide their real world identities, or a group that doesn’t have any crypto-related experience among them probably won’t be able to create a successful coin.

Bad ICO red flags

Serves no purpose. Becoming valuable is not a purpose. A coin needs to be able to do something in order to become valuable. For example, one goal might be to become the native token of a revolutionary new system that offers real value to users.

Imbalanced premine. The premine refers to the coins that are reserved for the development team, and set aside for them prior to the ICO. It’s meant to cover ongoing development costs. If too many are hoarded by the inside team, it suggests that they’re more interested in getting rich quick than creating a usable system.
No clear roadmap. There should be a clear series of objectives for the developers to achieve following the ICO, and estimated dates for the completion of each.
An inexperienced or unknown team. Creating a successful cryptocurrency isn’t easy. Most reputable ICOs will have experienced backers or developers who are willing to put their reputation behind the project, and have previous successes under their belt.

You should also look for ICOs that are committed to working inline with all government regulations when possible. If they don’t, the entire project might be on thin ice later and more likely to be shut down by regulators.

 

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ICO laws and regulations
ICOs are regulated differently around the world. They might be off-limits to investors from certain countries, or they might have their own terms and conditions to satisfy regulations.

For example, in China all ICOs were completely banned, while in Canada regulators warn that ICOs are likely to become securities. This means that ICOs are subject to a variety of rules that dictate how and when they can be subject to the public, putting a lot of restrictions on them.

What happens when an ICO breaks the law?
It depends on the situation, but in the examples to date, there are generally three potential outcomes:

The ICO refunds investors where applicable and either shuts down or moves to work with regulations.
Where there were clearly activities that were deliberately shady, those behind the ICO will be charged with fraud or similar. The difficulties around cryptocurrency mean investors are typically not refunded.
The ICO takes the money and disappears without any consequences.
Whenever you buy into an ICO, remember that there’s always a chance of losing your entire investment. With some due diligence, you can minimize the chances of this.

 

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How to invest in an ICO

Currently the most popular way to buy into an ICO is probably with Ether. This is because the Ethereum network is a very useful and flexible platform for creating new applications.

You’ll often see coins in ICOs specified as “ERC-20”. This generally means it can run on the Ethereum network, and can usually be held in an Ethereum-compatible wallet.

If you’ve found an ICO that you think will succeed, you might buy into it. However, before you do, check a few things:

Check the dates. ICOs are limited offers only, with tokens only being available for a limited time. There are usually several weeks or months of advance notice ahead of ICOs, and a clear indication of how long it will run for.

Check the prices. Consider the price next to the supply limit. To give you some perspective, bitcoin has a relatively low 21 million supply limit, while the Ether supply is unlimited, although its inflation is capped instead.

Check the wallet requirements. You might need to download a new wallet to support the coin you’re purchasing, or you may be able to hold it in a current wallet.
Look for red flags. These might be signs that an ICO is a scam, or that it’s just a bad coin which won’t go far.

 

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