Understanding ICOs
An ICO is a fundraising mechanism in which new projects sell their underlying crypto tokens in exchange for capital. Think of it as a crowdfunding campaign, but instead of getting a gadget or a T-shirt, you get digital tokens. While ICOs can be a legitimate way for startups to raise funds, they are also an attractive target for fraudsters.
ICOs can be lucrative, but they can also be ripe for scams. So, how can you avoid falling victim to a rug pull?
Red Flags to Watch Out For (In no particular order)
1) Anonymous or an unverifiable leadership Team:
Red Flag: If the team behind the ICO isn’t transparent about their identities, it’s a major red flag. Legitimate projects typically have team members with verifiable LinkedIn profiles or X (previously-Twitter) handles and a history of involvement in reputable ventures.
Example: Imagine an ICO with team members who only have first names and no professional history. It’s like buying a car from someone in a dark alley—risky and unwise.
2) Whitepaper lacks a clear, realistic roadmap or is poorly written:
Red Flag: A credible project will have a well-written, clear, and detailed whitepaper explaining the project, its purpose, and how it plans to achieve its goals and shows the project’s future and milestones. If the roadmap is vague or overly ambitious without any achievable milestones, be cautious.
Example: An ICO promising to revolutionize multiple industries within a year without any intermediate goals is like someone saying they’ll climb Mount Everest next week without any prior training.
3) Unrealistic Promises or promises of guaranteed returns or profits
Red Flag: In the investment world, be it crypto or stocks, nothing is guaranteed. If an ICO promises sky-high returns with no risk, it is highly suspicious and most likely a scam.
Example: An ICO claiming you’ll double your investment in a month is akin to someone offering you a map to buried treasure—highly suspicious and likely a scam.
4) No working product prototype, or even a proof of concept:
Red Flag: If an ICO is asking for money without any tangible product or prototype, be wary of the project. Legitimate projects usually have some form of a working model or a minimum viable product (MVP) before seeking any investment.
5) Same website layout with minor changes:
Red Flag: You can tell an ICO is a scam by the amount of time the ICO team took to develop the site, Scammers often use the same template to create multiple fraudulent ICO sites.
Example: You notice the ICO website has the same design and layout as a few other ICOs you’ve seen. It just comes with different colours and logos that look outsourced from Google.
6) Weak or no social media presence (social media is quieter than a library):
Red Flag: If the ICO has a non-existent social media presence or barely has any followers on its social media and isn’t being discussed by reputable sources, it might be dubious. Genuine ICO’s take weeks or months to build their social media channels prior to launch.
How to Research ICOs Properly (Not an exhaustive list)
DYOR – Do your own research:
- Use crypto tracking websites like CoinMarketCap or CoinGecko to search for the coins. Examine liquidity, trading volume, tokenomics, and other essential data points.
- Visit the project’s website and look for signs of unprofessionalism. Thoroughly review the content to ensure it is informative and not just flashy.
- Utilize crypto project research tools like Binance Research or Messari to gather further information and notes on the project.
- Search for the project’s initial coin offering details, including the roadmap and fundraising goals, on sites like ICO Analytics and ICO Drops.
Due Diligence on the Founders and the Team: - Investigate the founders’ background by checking their credentials, professional history, and previous involvement in reputable projects. Identify their prior work experience.
- Search for the founders on Google and LinkedIn, and look for any past interviews on YouTube. Seek team members with a proven track record in blockchain technology or related fields.
- Analyze the whitepaper:
- White papers are often simpler than they appear. Aim to grasp the project’s objectives, technology, use case, and roadmap. Focus on clarity and practicality.
- A well-written whitepaper should provide all necessary information about the project, eliminating the need for further clarification.
- Check for a Working Product or Prototype:
- Look for what the product is trying to solve, what the value proposition of the project is, if any, and what the project does, and ensure there is tangible progress on the project and that the team can deliver what they promise.
- Community and Media Presence:
- Evaluate the project’s reputation and the community’s sentiment by examining social media activity, such as tweets. Pay attention to how engaged and active the community is.
- A project that has an active, supportive community and is featured positively by reputable media sources is typically a positive indicator. Check if the admins are genuinely addressing community questions or simply hyping the project.
- Utilize other social media platforms like Discord and Telegram to further investigate the signs we’ve discussed.
- Liquidity:
- Investigate how the tokens are distributed within the project. Could the sale of shares by a single person or a small group cause a significant price decline? Look into coin distribution and the percentage of holdings per wallet to determine if one or a few wallets control a majority in the project. Coin distributions can be checked using a block explorer such as Bscscan or Etherscan.
- Generally, a high trading volume indicates a healthier market with less potential for manipulation. You can verify this through various sources, such as coin tracking websites.
