ICOs have opened to most people investments in blockchain ventures. Within the third quarter of 2017 alone, ICOs raised greater than $1.3 billion for crypto ventures — roughly 5 instances greater than funding raised by way of enterprise capital within the blockchain area.
There were more than 200 ICOs in 2017, and conducting due diligence on all of them could be extraordinarily time-consuming, even for a educated analyst, not to mention an beginner investor. That is compounded by the truth that blockchain continues to be thought of to be an early-stage know-how, with new consensus mechanisms and use circumstances being developed on daily basis.
With exponential development in public curiosity, esoteric terminology and a lax regulatory framework, it’s no shock that some ICOs have been used to fund scams and cheat traders of their cash.
Whereas nothing can compete with high quality due diligence, realizing which purple flags to search for with the intention to keep away from scams or dangerous ICOs could be useful.
Use case doesn’t require blockchain
Not each enterprise wants a blockchain, and never every thing must be decentralized. This may appear apparent, however with all of the hype round blockchain know-how and its disruptive potential, it may be simple to latch on to an concept the second its whitepaper mentions a big trade the undertaking is purportedly tackling.
Even initiatives that require cryptocurrencies as fee (e.g. Steemit, which rewards writers on its platforms with a local “digital factors system,” Steem) might very properly survive with current cryptocurrencies like Bitcoin and Ether.
When evaluating an ICO, a superb first query to ask is: “Do we want a blockchain or a local token for this undertaking?” If the reply isn’t any to each, chances are high the ICO undertaking is an instance of solutionism — crypto for crypto’s sake — or a rip-off.
Empty repositories for open-source initiatives
If an ICO undertaking is proposing open-source code, an empty or nonexistent GitHub is usually a purple flag.
One of many key traits of many public blockchain initiatives is the truth that they’re open-sourced. This implies the code base is usually uploaded to repositories like GitHub for all to look at. For individuals who have blockchain programming expertise, wanting by way of the revealed code can enable them to gauge a undertaking’s validity.
If one thing looks like a rip-off, it in all probability is.
Probably the most apparent purple flags for a rip-off undertaking is the shortage of element on how the know-how works. For nontechnical traders, it may be useful to easily verify if a undertaking has any current information uploaded to public repositories or if a undertaking has a functioning product.
Whereas Reddit is usually not an advisable supply for funding recommendation, sub-threads devoted to discussions of particular ICOs or crypto property usually supply a superb entry level for the extra technical evaluations.
Mining construction disproportionately favors improvement crew
Whereas not at all times an correct litmus take a look at for scams on their very own, the availability schedule and mining construction of an ICO can be utilized to cross-reference different information factors and validate the intention of the founders.
In easy phrases, a premine refers to when a portion of the tokens for a crypto undertaking is made obtainable to a small group previous to being made publicly obtainable. At instances, this generally is a needed car to reward builders and early traders. Nevertheless, if the proportion of complete tokens provided all through the lifetime of the undertaking reserved for a premine is excessive, there’s purpose for concern.
As an example, Paycoin, whose founder was found guilty of operating a $9 million fraud scheme, had nearly all of their tokens reserved for builders on the undertaking. Favoring the event crew may very well be a sign that the crew’s intent is to maximise their private monetary achieve from the appreciation of the token, fairly than preserve the viability of the blockchain community over time.
Nameless crew or crew with weak expertise
Understanding who’s on the crew behind a blockchain undertaking is probably crucial step in your due diligence. Even when the premise of the enterprise and the addressable market appear enticing, one of many largest determinants of a enterprise’s success is the make-up of the crew behind it.
It’s usually a purple flag if the crew behind an ICO doesn’t have any named full-time builders. Extra warning must be taken if not one of the management crew has any area data within the particular vertical.
When a crew and verifying their expertise, platforms like Twitter and LinkedIn are helpful. Nevertheless, it’s essential to notice that they aren’t infallible, as profiles could be faked. If members of the crew declare prior affiliation with universities or firms, double-checking with respected third-party sources (e.g. a college newspaper or the corporate web site) can present the info.
ICOs usually listing their advisors on their web sites. You must also confirm whether or not the advisors are authentic.
Inadequate info on web site/whitepaper
If one thing looks like a rip-off, it in all probability is. When you find yourself uncertain whether or not a undertaking is a rip-off, it’s higher to err on the facet of warning. Whereas it’s doable that the shortage of well-designed web sites and detailed info for a crypto undertaking is as a result of the undertaking continues to be in its infancy, it may be exhausting to find out whether or not a undertaking is underdeveloped or a rip-off.
In lots of circumstances, they are often each. In these circumstances, traders can both await extra info (reminiscent of within the case of Asia-based ICOs, the place info is simply translated into English in a while within the undertaking), or just keep away from ICOs they don’t absolutely perceive.
Nothing can compete with high quality due diligence.
One other essential supply of knowledge for all ICOs is the whitepaper — the doc that outlines the mission, technical particulars, crew and different essential particulars behind the enterprise. Whereas the beginner investor might not have the technical background to completely perceive each facet of a whitepaper, common understanding of blockchain ideas is a should when evaluating whitepapers.
Some extra authentic initiatives (e.g. Ethereum) supply a high-level whitepaper outlining the important thing factors of the enterprise, alongside an in depth technical doc that explains the know-how behind the undertaking.
No clear roadmap
Usually, ICO initiatives listing their funding and improvement objectives on a transparent timeline for investors to see. The dearth of a transparent roadmap might point out that the growing crew has no long-term plan for the undertaking, and as such is prone to be motivated solely by short-term monetary achieve. Paired with a big premine reserved for the growing crew, this may very well be a powerful indicator that an ICO undertaking is to not be trusted along with your cash.
Usually, ICO initiatives may have devoted Slack or Telegram channels that the general public can be a part of. Via periodic updates distributed on these channels, potential traders can get a way of how the undertaking is growing.
Nevertheless, malicious scammers can simply create a timeline out of skinny air or present pretend updates on chat apps. Whereas the shortage of a timeline is actually a purple flag, the existence of 1 is just not a completely ample situation to point the legitimacy of an ICO undertaking.