As blockchain and crypto grab headlines the world over, the marketplace for blockchain-based companies has been flooded, with four times as much money raised by ICOs in 2018 than 2017 already. However, the unregulated world of ICOs - where new companies can raise millions of dollars on the strength of a bright idea, and where even seasoned investors can be duped by the hype - has predictably proved irresistible to a raft of unscrupulous hucksters.
It's been reported that up to 80% of advertised ICOs are in fact scams, so how do investors - particularly those new to investing or cryptocurrency - stay savvy and keep their money out of the grubby hands of schemers?
Do your background research
If you're considering investing in a crypto or blockchain project, you should immediately start researching the project to within an inch of its life. This research should focus on a few different areas.
The whitepaper is usually the only document that blockchain investors have to judge the strength of a company's business idea. It should be clear, concise and not too jargon heavy, but most importantly it should lay out - in great detail - the business idea, the aims, how these will be achieved, the time scale, and important details about the funding model and token sale.
Telltale signs that the business proposition could be a fraud (or simply not a very sound business idea) is that the copy is vague or filled with buzz words, devotes much space to discussing blockchain-related concepts that don't have very much to do with the project's core idea, and simply seems poorly thought out. Alternatively, it could be well written and appear polished but if you look beneath the surface, the business idea itself may be shaky or infeasible.
For comparison, look up some successful or at least definitely legitimate blockchain-based companies and examine their whitepapers. Contrast these with the whitepaper of the company in question and see whether they have covered the same bases and provided the same level of detail. If not, or if there are certain crucial pieces of information missing, then this could be a sign that the ICO will not be legitimate.
Any mention of 'guaranteed returns' or specifications of what returns you will get on an investment are big warning signs. Aside from the company's blatant inability to know what returns will be generated, any business idea that puts emphasis on the monetary incentive over and above communicating the strength of the business idea is definitely suspicious.
Most legitimate proposals will not have any mention of expected returns, and in fact a growing number are launching 'utility tokens' that will have value within the company's ecosystem. This means they would like token holders to use these to interact on the site and not merely hoard them in the hopes of the value increasing - something at odds with any site encouraging supporters to simply buy the tokens in the hopes of cashing up later.
The website is the team's storefront window. It's one of the only things potential investors will have to go on, so teams should invest time and energy into making it polished and communicative of the essence of the project idea. A sleek, polished-looking website is a good sign, but it's not enough of a guarantee. Fraudsters could still spend money to create an aesthetically beautiful website that is shallow in quality content.
Examine other materials on the site. Other than the whitepaper, the most engaged teams may also have links to a blog, or posts hosted on the site. They may provide comprehensive press materials, or videos presenting the team or concepts. Do the materials on the site convey a genuine passion for the business idea outside of a means to get filthy rich?
These things don't ensure that the project is not a scam, but they are definitely good signs.
The developer team
Check the identity and experience of everyone involved in the development team behind the project. Who are the founders? Are their identities and credentials verified elsewhere, like LinkedIn for example?
Does the business idea make sense given the team's background? For example, one blockchain company Techworld recently spoke to, Bee Token, is a decentralised home sharing platform. The founders behind the project are former Uber employees, clearly demonstrating their long-term interest and investment in the sharing economy. Another, DADI, is a decentralised internet project coming from a team that used to specialise in open source website-building technology.
In both cases, there is a clear progression in terms of interests and experience. If someone crops up in an area in which they have no prior expertise or interest, this could be a sign that they have simply attempted to come up with a potentially - on the surface at least - viable idea for a project they think could gain traction online.
Some fraudulent schemes will advertise well-known 'blockchain superstars' as advisers or team members. Always check the veracity of these claims by investigating them thoroughly. The 'adviser' in question would also likely reference their involvement somewhere else so if you see no evidence of this then be wary or try to contact them via Twitter or email to ask them about it.
Approaching any potential blockchain or crypto investment, take a 'guilty until proven innocent' stance. Don't assume it is a legitimate and sound investment, scour the website and information provided by the company for indicators that it is in fact fraudulent. Something seems off? Investigate.
Most of the newly launching blockchain companies holding ICOs will have actively engaged Telegram groups, where founders or the wider team should be happy to address any questions you have. If you see that information normally included in the whitepaper isn't there, ask why, and harshly judge the genuineness of the response you get.
If the founders aren't actively addressing concerns and providing information in a Telegram group or via other social media or email, this could be a worrying indication in itself. However, if their social media is very overactive and ceaselessly filled with fluff and hype about how successful the project will be and how rich it will make investors, then that is another damning sign that all is not good.
See what others are saying
There are a growing number of (at least purportedly) independent sites that are aiming to help investors check on the legitimacy of upcoming blockchain companies and their token launches. Some give a rating based on a number of different factors such as information, finance and team. A couple of these are FoundICO and ICORating. While others are geared towards helping you to weed out scammy sites, such as ICO Alert.
We can't vouch for the quality of information provided on these sites, but it might be worth seeing what they say about a potential investment idea. The SEC even set up a fake crypto site to show people what they might look like, HoweyCoins.
There are also rafts of crypto-related forums online (on Reddit for example) where you can see what crypto investors are saying about a prospective investment. If you have doubts, you can take them here, and see what other, more experienced investors think.
Anatomy of a scam - Examples
Pincoin and iFan - This is one of the biggest crypto exit scams so far. Earlier this year, a Vietnamese company, Modern Tech, swindled 32,000 investors of a collective $660 million in a scam purportedly aiming to launch a social media platform for celebrities. The company claimed to have plans to build an ad network, investment portal and peer-to-peer marketplace, all built on Blockchain technology. In one of the biggest giveaways that it was fake, the company was promising investors up to 40 percent monthly returns on their investment.
The founders fled Vietnam, leaving angry investors to protest outside their empty offices.
Plexcoin - This scam was shut down in December 2017, after being labelled a ponzi scheme by the SEC. This scam was promising investors an incredulous 1300 percent return on investment. Over $15 million was raised by the company but luckily the funds were frozen and the culprit, Dominic Lacroix, was arrested.
Both of these companies advertised huge returns on investment as a way to ensnare unsavvy investors - proof that this should be one of the greatest red flags to potential blockchain investors.