How to spot a fraudulent ICO 15290

How to Identify Scam ICO

Fraudulent ICOs?

It happens to the best of us. You find something exciting and buy it. Or share the news. Or invest in it, or tell others to invest, or simply start believing in it.

It’s not new and it’s not stupid. And it usually happens at times of great effervescence, when it gets hard to tell science from scam. At the end of the 19th century, people believed in snake oil recipes to all kinds of ailments because science was making real progress and they couldn’t tell the difference between extraordinary medical progress and sensationalist miracle-like fake cures. Nowadays, people believe in miraculous software development and get-rich-quick schemes because, well, there have been amazing stories of miraculous software development, and people have indeed gotten rich almost overnight.

It’s the same with ICOs. They are an incredibly smart and simple solution to fund companies without begging for money from venture capitalists. Initial Coin Offerings instead have these startups issue tokens that can be bought by anyone to support their project. If the project goes well, tokens go up in price and you see great return on investment; if the necessary funds are not raised, you get your investment back; and if the project gets made, but makes no profit – well, you will at least get access to the product or service and maybe see a minimal RoI.

There’s another scenario, though: you invest in an ICO that looks promising, then the project rides off into the sunset on the back of a pink giraffe, together with the money of one and all investors. A scam. [ Ask DJ Khaled about Centra. He knows all about pink giraffes now, I bet, though it wasn’t his own money he lost; just his Instagram followers’. ]

So then, assuming you don’t have the money to commission an audit on the company or the smart contract itself, how do you spot a fraudulent ICO?

1. Start with the team.

In many cases, this is where your research will end. If the team is shady, look no further. See what their experience is. Can you find any of the team members on the internet? Are they who they say they are? Do they have profiles on any network, especially LinkedIn and Crunchbase, or are stey stock photos and fluffy resumes? Has this team produced anything yet?

Are all positions accounted for? Is there a management team, a development team, a legal adviser?

Do they have any interesting advisers, backers or prior investors? Forget celebrity endorsements; you know how these are bought and how much they are worth.

2. Read the white paper and roadmap.

A good project needs to be able to explain itself, which is what a white paper does, and how it will get where it wants, financial goals included, which is the role of a roadmap. Does the white paper make sense? Does it contain too much mumbo jumbo, buzzwords and fluff, i.e. marketing hype instead of technical solutions? A white paper should explain why the project is interesting, what it is going to accomplish, what its unique selling proposition is, what the technical implementation will look like, what the business model is, how it’s going to make money, and, most importantly, why it needs tokens. A lot of ICOs issue tokens just because they can.

3. Does the project bring anything to the table?

This relates to the white paper above, but is also an important issue to consider separately. Does the product or service make business sense? Is it original? See if there is any market research and competitive analysis. Is there a market fit there? If the project is vague and doesn’t seem to have any added value or originality, why would you even bother to consider it? Don’t assess project value based on how much money the team has put into website design and aggressive marketing.

4. What regulations are in place?

This is a very important point to consider, though your eyes may be already glazing over just at the notion of regulations. Due diligence here starts with looking at where the ICO originates. Switzerland, the U.S, Germany are good, though only partially regulated; Caribbean islands are not. Bottomline: check if the ICO comes from a legitimate place, and check if you, wherever you are, are legally allowed to participate. China, Bolivia and Macedonia, for instance, ban ICOs and altcoin altogether (without altcoin there is no ICO, so they’re pretty much overlapping) . Look for countries with basic KYC/AML (Know Your Customer and Anti-Money Laundering) requirements, which ensure that there is sufficient identification of users to allow for action against criminal activities on the network.

5. Token distribution

How will the new tokens be distributed between the investors and the team members? Too few coins for the team will de-incentivize them. Too many will give them too much power. 20-30% percent is an acceptable amount; beware of extremes. Also, most importantly, team members should commit to token retention – i.e. not sell their tokens for a certain period – as proof of good intentions. All info should be public and clear; if not, be suspicious.

6. Transparency

Empty repositories, no community involvement or support across GitHub, Reddit or anywhere, opaque management, no Q&A anywhere with anyone, no participation in forums, a website with pretty pictures but no hard data, all these are alarm bells for the wary investor. Transparency is key, from publishing open-source code to allow developers (or anyone) to check for code health, security etc., to the accessibility of the startup founders on community platforms. No transparency? Assume something’s rotten.

7. Other tell-tale signs

Guaranteed profits have long been known to be a red flag in any business venture, because, well, there’s no way the crypto realm can guarantee anything, really.

Copy-paste practices in white papers, roadmaps, code bundles, team bios, even team member photos are widely used by fraudulent ICOs.

Capped/uncapped funding is also to be examined. Hard caps have their problems, especially that they send investors into a frenzy of shoving funds in at the last moment, but they seem a better indicator of reliability. Soft / open caps allow founders to keep an ICO open until they feel good enough about the amount to close it and make off with the proceeds. Open caps are not all fraudulent, by any means; they are to be used in conjunction with other indicators of shady activity.

Premining or preferential access gives access to a small group of investors before the actual ICO even starts is usually a bad sign. The ICO might be over in 30 seconds, then tokens are dumped are you are left with a very shady deal.

An escrow account should be in place. This is usually done with a multisig wallet to secure investors’ funds during and after the ICO. No escrow account doesn’t automatically mean fraudulent ICO, but, just as with other signals listed above, can raise legitimate suspicions.


About a hundred ICOs are launched monthly, and ICO funds raised so far in 2018 have already doubled the amount raised in all of 2017. In other words, it’s a very, very hot market.

On the other hand, though approximately $5,6 billion were raised through ICOs in 2017, only 50% of the ICOs were successful, and an untold number (some say 80%) were downright fraudulent. Before reading this article, you had an excuse; now you really, really should know what to pay attention to. Take advantage of the crazy-wild potential of ICOs, but invest responsibly.

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