10 Ways How to Spot a Scam ICO

In the Modern world of Cryptocurrencies, ICOs or Initial Coin Offerings have captured the attention and focus of general public investments around the world. Last year, the combined net worth of funds raised collectively by ICOs, crossed 1 Billion Mark, a milestone in crypto ventures. Initial Coin Offerings involve the general public, as opposed to funding through venture capital like in the case of other Blockchain projects.

According to Coinschedule stats, there was an excess of 200 Initial Coin Offerings in the year 2017 alone. There is a wide range of ICOs to choose from, which makes the process of conducting due diligence on all of them an almost impossible task. This, coupled with the fact that Blockchain technology is still considered to be in its fledgling stage, makes it a risky affair to predict, even for the most seasoned and experienced crypto-traders.

Founder of Coinschedule, Alex says,

“Here in Coinschedule, we have been detecting, preventing and removing fraudulent ICOs for almost two years. We have developed an algorithm to assess the risk of the ICOs using the criteria that we found to be the most effective, but there are also other telltail signs that people should check for, before joining an ICO.”

As it stands, ICOs, with their esoteric terminology as well as loose and incompetent regulatory frameworks are pretty hard to trial for due diligence. This article serves as a general guide to identify Ten Red Flags to watch out for, in order to avoid ICO Scams in future.

1. Understanding Unlimited/ Hard Cap:

From the initial stages of ICOs when they were first introduced, there wasn’t any stark difference between the concept of open cap and a hard cap. An open cap allows sending funds to an ICO Project wallet without any limit while projects with hard caps have a limit on funds that can be raised. ICOs with no caps, (although not in all cases) are considered red flags in this context. Such ICOs result in no percentage gains as in the case of Bancor which raised $150 million under three hours.

2. Open Source Projects Having Empty Repositories:

Most public Blockchain Projects have one thing in common; they are all open-sourced. In this case, the code base is often uploaded to GitHub or similar repositories for the public to examine. Experienced Traders with prior blockchain programming experience can view the published code to ascertain a project’s validity. However, this poses a problem for novice ICO backers who come from non-technical backgrounds as they have problems gauging the code. Even more so, if in this case, an ICO project has proposed an open-source code with an empty or non-existent GitHub is definitely a red flag.

3. Anonymous or Less Experienced Development Teams:

Understanding and finding out about information relating to a project’s team is probably the most crucial step for conducting due diligence. Often the premise and the addressable market of a proposed ICO project may seem attractive, but proper research regarding the team behind the project, using platforms like Twitter or Linkedin or other reliable press release sources is always advised. In this case, if the team behind an ICO does not have a clearly named development team, it is definitely classified as a red flag.

4. Improper Website/Whitepaper:

Incomplete Whitepapers or poorly designed websites should also invoke serious doubts and caution in the minds of backers. While such signs can also signal that a project in its infancy stage, certain tell-tale signs regarding the whitepapers and website can be considered as a red flag and should be avoided.

5. Unclear Roadmap:

A roadmap is a summarized document where ICO projects can list their funding objectives and development goals with a clear timeline for all potential backers to see. Proper ICOs have clearly indicated roadmaps which they follow. However, the lack of a clear document of this type could indicate that the development team has only short-term financial gains in mind, a clear sign of a malicious intent. This combined with other factors like a large pre-mine reserved for the development team can serve as a red flag, and should be avoided by investors at all costs.

6. Disproportionate Token Distribution Structures:

The Supply schedule, as well as the token distribution structure of a particular project, can be used to check data points as well as validate the intention of the founders. A premine refers to a portion of the developed tokens made available to a small group before an official public release. Generally, a premine is used as a vehicle to reward developers as well as early investors. However, if the premine percentage supplied throughout the duration of the project is particularly high, it should be considered as a red flag.

7. Non-Blockchain Use Case:

In the Cryptocurrency space, not all ventures utilize the blockchain technology or strive to become fully decentralized. However, you can easily latch on to an idea the moment its whitepaper mentions a large industry and the involvement of blockchain technology. As a potential backer, one should always ask the question,” Do we need Blockchain for the large industry which is talked about”? If the answer is a “no”, then it is definitely a red flag.

8. Community and media Involvement:

For an ICO, it is crucial to have a wide and open supporting community like a public Slack to interact with each other. Transparency is a major requirement for an ICO to have a legitimate image in the eyes of those who are participating. Certain factors like the number of backers present, the topic of discussions and the overall atmosphere of the community can be key indicators. If anyone of these factors contains suspicious elements, it is definitely a red flag.

9. Presence on Coinschedule and other related forums:

Apart from Coinschedule.com, Bitcointalk.org is also a very reliable forum and can be a great way to check out the most popular ICOs. Other notable sites also publish information about scam ICOs regularly. If the selected ICO is not in such archive sites or is listed as a probable scam, it is a clear red flag indication. Always drive discussions on these forums to see what others have to say.

10. Plagiarism:

Always check for plagiarism in the websites, whitepaper as well as other aspects of an ICO. While these signs are readily not visible, any indication of plagiarism increases the chances of it being a scam. In many past cases, new ICOs have blatantly copied content or other related content from another company without prior permission and have turned out to be frauds. Recently, an ICO called Smart lands have allegedly copied their logo and elements of their whitepaper from another Cryptocurrency called EverGreenCoin. The Community at large is suspecting that this is a part of an elaborate scam. Thus certain indications like these can also be considered as red flags in this context.

You can read the EvergreenCoin/Smartlands story here.


Disclaimer: This post is written as a general guideline for readers who wish to participate in an ICO. We make no guarantee and promises in the favor of any ICO to be successful. Your own research/diligence is necessary before making any participation decision.


DISCLAIMER: Opinions expressed by Coinschedule Blog contributors are their own.

Hira Saeed on Twitter
Hira Saeed
Founder of Tech Geeks Pakistan and Digital Doers. Hira is also a public speaker and columnist who shares her views on Startups, AI, chatbots and Blockchain technology on VentureBeat, The Next Web and Tech In Asia.


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