Don't fall prey to another ICO scam.
Initial coin offerings (ICOs) are all the rage. There are even some ICOs we wish would happen in Asia. But it seems that ICOs has also been a new way for scammers to make a quick buck.
ICOs allow companies to raise money by issuing cryptocurrency tokens that users can buy and later trade on cryptocurrency exchanges.
The concept is similar to an IPO, but instead of shares, companies issue tokens. Some companies promise to buy tokens back from users after a product becomes successful or when the token’s value increases.
Riding on the trend of ICOs, it has been found that four out of five ICOs that have taken place in the last year have been classified as scams.
The findings are according to a recent study by Satis Group, an ICO advisory firm.
ICO scams: Only 8% of ICO tokens have ended up on exchanges
The Satis study organised ICOs in six categories, based on their current status. Only ICOs with a market cap of $50 million or higher have been included in the results. But the percentage of scam ICOs would have probably be higher if they took into account the smaller ICOs.
According to study, 81% of ICOs were Scams, 6% were classified as Failed, 5% had Gone Dead, and ONLY 8% made it onto an exchange.
Even so, the success rate of ICOs is low. Out of those listed on an exchange platform, 2.8% were in a Dwindling state, 1.6% were considered Promising, and only 3.8% were classified as Successful.
This list shows the classification that the study has come up with on ICO scams:
In another study by Ernst & Young, it was found that only 10% of all ICO funds were lost to hackers and scams in 2017, which shows that most of the people who invest in it are discerning enough to identify a scam.
But just in case…
Here are 3 ways to identify ICO scams
1. The developers are anonymous
One of the biggest red flags when it comes to ICO scams is if the token’s developers are anonymous or unknown. Yes, the creator of Bitcoin remained largely anonymous till recently. But that was because he created a network that did not depend on the trustworthiness of a central authority.
This is not the case with ICOs. By holding an ICO, a startup is asking token buyers to trust that the developers will deliver a working product instead of running off with their money.
PlexCoin, for example, declined to reveal the identities of its team members, to hide the fact that one of its organisers had run afoul of securities regulations in Quebec on several occasions, both before and during the PlexCoin ICO.
2. The token does not have a clear use case
Another sign of an ICO scam is when the developers are unable to give a valid use for the token. The token should serve a key purpose in the startup’s platform – whether it is to buy a product or service or otherwise.
Adding onto this are tokens that advertise themselves merely as digital currencies without offering any real innovations or improvements upon existing cryptocurrency technology.
3. The whitepaper sets unrealistic goals
Sometimes, even if the token does have a clear use case, token buyers should take note if they suspect an overly-optimistic whitepaper. If the whitepaper sets look unrealistic and seem over-promising, it could mean that the developers are trying to oversell their token or that they simply have no idea what they’re doing. Either way, it’s bad news.
So now that you know what to look out for in ICO scams, would you consider investing in an ICO? Let us know in the comments.
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