Initial Coin Offerings (or ICOs) are a popular way of raising funds for startups in the cryptocurrency world. With the birth of Ethereum and the subsequent adoption of the ERC-20 Token Standard, venture capitalists and developers alike were empowered with more flexible smart contracts. Basically, this started a huge wave of ICOs, for different industries and for different purposes, and has opened a window of possibilities for venture capitalists. 2017 became the “Year of the Altcoin”.
But while ICOs have proven themselves to be a less rigorous and less regulated version of an Initial Public Offering, most startups also take advantage of the private and decentralized attributes of cryptocurrency. They don’t call cryptocurrency world as “the wild west of investing” for no reason. As a result, some ICOs turn out to be snake oil salesmen in disguise: trying to sell an “ambitious” project while misleading the community away from their shady promises.
In cryptocurrency we have a saying:
“If something seems like a scam, always presume that it probably is”.
Be careful with ICOs with regard to:
- The Team. The people working on the crypto project can make or break an ICO. Their skills and experience are key in making the ICO successful. When no team at all is presented in the website, or they try to stay completely anonymous (also, no profiles on LinkedIn etc.) or when the team doesn’t respond to queries in social networks or chat rooms, or when they look like they aren’t skilled at all in comparison to the scale of the project (especially if they know nothing about developing cryptocurrency), it’s best to stay wary as they can cut ties with you (and your money!) at any time with no trace whatsoever.
- Use Case. What value does the token of an ICO have if it isn’t even important for the concept of the ICO itself? If you can remove the token in the startup itself without substantially affecting the startup’s purpose, then that’s a big red flag. If Juan or Juanita offer a token where the token’s function is merely to give out “dividends” or “stocks” or “stock options”, then the token might be closer to the security and the SEC or the BSP might take notice (which is not good). If after ICO, the use case of the token is basically useless, then might as well not do an ICO at all.
- The Whitepaper. The Whitepaper contains the core concept and game plan of the startup company. It outlines the mission, technical details, team and other crucial details behind the venture. In reading whitepaper, at least a basic understanding of technical aspects of a blockchain is a must. Lack of clear details about their agenda on the whitepaper is a serious red flag, as it indicates that they have no clear goal at all and are only in it for the ICO money.
- The Roadmap. The Roadmap is so important that most ICOs have it plastered in their main websites (not doing so is a red flag in my opinion), because it illustrates the goals that the startup wants to accomplish and serves as a notice for all investors to see. The lack of a clear roadmap could indicate that the developing team has no long-term plan for the project, and as such is likely to be motivated solely by short-term financial gain. Paired with large premined coins reserved for the developing team, this could be a strong indicator that an ICO project is not to be trusted with your money and a serious indicator of a “pump and dump” scenario.
- Open-source code. The open-source code is always an indicator of goodwill between the blockchain creators and the users, so that the users can see the naked code itself and it could be open to their scrutiny. One of the key traits of many public blockchain projects is the fact that they are open-sourced. This means the code base is often uploaded to repositories like GitHub for all to examine. A red flag can be seen if they have no GitHub page of their code, or that their GitHub page exists, but it’s empty, or has seriously flawed code. If you aren’t a programmer yourself, internet forums (who usually scrutinize code well) can help you form an opinion about an ICO.