What is an Initial Coin Offering? Or Initial Coin Offering, we used to write an article about it here. Here's a quick refresher; An ICO is an unregulated way to raise funds for a cryptocurrency startup, similar to crowdfunding.
The difference? The fact that investors in an ICO don't give funds directly, they buy tokens and in return, they expect a return on their investment.
ICOs bypass the rigorous and regulated fundraising process imposed by banks and venture capitalists. ICOs are similar to initial public offerings (IPOs) that are issued by new companies to raise capital in exchange for shares.
In an ICO, it is virtual tokens or coins also known as tokens, instead of shares in exchange for capital. This considerably reduces the costs and time between the intention to buy and the moment when the investment is effective for the project.
In ICO campaigns, a portion of the tokens is sold to the very first backers of a project in exchange for traditional currency or another cryptocurrency. In order to launch a campaign, a company creates a whitepaper describing the scope of the project, the amount of capital needed for the company, the type of currency accepted and the duration of the ICO campaign.
Risks associated with ICOs
ICOs are inherently risky because they are unregulated, making them vulnerable to fraud. Scammers offering an ICO will attempt to drive up the price of the cryptocurrency to a certain point, at which point they will sell their entire interest. This is pump & dump, artificially raising the price to resell and collect profits, or conversely creating a panic over an asset to make people sell en masse and buy back at a lower price.
Fund investors holding coins from an ICO will then see their value drop dramatically, resulting in a loss of their investment.
The risks associated with ICOs have led some governments to consider regulation of the industry. In many countries around the world, ICOs are completely illegal.
World Crypto Index reports that in September 2017, China banned cryptocurrency trading for its residents, while making it a prosecutable offense to use ICOs for fundraising.
That being said, ICOs are still being used to generate capital for startups and hundreds of millions of dollars are being raised through them every month.
To mitigate risk, investors must learn to recognize the signs of an ICO scam.
6 signs that an ICO may be a scam
There are several signs investors should look out for to determine if an ICO may be a scam. Check out these signs now!
1. Non-existent or poor quality website / whitepaper
When launching an ICO campaign, a company normally publishes a white paper and directs potential investors to a website describing the entire project. Legitimate startups explain why people should invest in the project and its potential value.
Investors should research the company thoroughly to avoid scams (DYOR). Thoroughly analyze the white paper or website for false information or misleading statements. Check references from current investors, which can be used to encourage new investments.
If the white paper or website related to an ICO does not exist, this should be a red flag. If its content is limited, it indicates a lack of involvement from the team, which could be interpreted as a botched project.
2. Lack of named developers or team members (Team)
A valid white paper should give details of the team behind the venture to help give credibility to the project and develop trust. Team members and developers should be researched individually to determine if they are legitimate or not. Valid ICOs often provide one or more channels for investors to contact a team member directly to learn more about the project. Scammers will want to avoid being held accountable and will avoid naming anyone associated with their ICO. A project without a team is naturally suspect.
These days, scammers are becoming more meticulous. They may undertake the creation of a fake team from scratch and create chat channels where they will take care to support the scam. With your research, you need to multiply the evidence that the project is understood by the community, that the developers are known and that nothing is suspicious during various searches.
3. No clear roadmap
Legitimate ICOs must provide potential investors with a detailed timeline of development and funding goals. The company should also give some indication of how it plans to develop its future growth. If this is lacking, it's a sign that the people behind the ICO just intend to make a quick profit before folding the company.
4. Biased token distribution structure (Tokenemics)
Another warning sign is that the ICO team is stockpiling a significant amount of pre-mined tokens. This could be a sure sign that the project is motivated by short-term financial gain. A project's token distribution schedule can be an indication of the team's intent. Pre-mining generates tokens for a small group of individuals before the token sale is made public.
This is often done to reward developers and early investors, but later investors should be concerned if the number of pre-mined tokens is disproportionately high. Like, for example, more than 50% of the tokens to developers.
This could indicate that the motivation for the ICO is short-term financial gain for the team members. Every project is different, but overall no true crypto project keeps 50% of the tokens in circulation.
5. Uncapped fundraising goal
ICOs are usually created to raise a specific amount of capital to fund a project and launch its growth. A legitimate company will state this goal in its white paper or on its website. If an ICO is launched without a specific funding goal, this can be a sign that the ICO's goal is not legitimate and can be used to scam investors.
6. Evidence of a pyramid structure
If an ICO has a tiered structure that encourages people to bring in new investors to be rewarded, it is likely to be a pyramid or Ponzi scheme.
Evidence of such a structure should be a clear warning. For many startups, affiliate marketing is a viable way to generate revenue faster. Beware, there are some very good affiliate-based projects, however, the pyramid structure brings rapid growth, which is mainly sought after by scammers wanting to get out fast.
These types of scams usually collapse when the number of new investors decreases significantly and current investors stop getting paid.
Conclusion
If used legitimately, ICOs can be a quick and cost-effective way to generate startup capital. This helps companies grow faster and generate meaningful returns for investors.
Investors and affiliate marketers should weigh the risk associated with ICOs against the prospect of realizing faster returns than with traditional stocks.
The risks associated with investing in ICOs may preclude investors who cannot afford losses.
However, ICOs can be very profitable investments if investors and affiliate marketers do their homework and heed the signs to not promote a scam.
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