Getting involved with ICOs, altcoins and blockchain talk, in general, can be exciting and overwhelming. Especially when hearing about the huge profits that can be made from investing in crypto or the numerous applications of blockchain technology which can be quite thrilling. However, the first thing that comes to mind when thinking about unregulated crowdfunding is the safety of the investment. Especially when considering a decentralized system. One of the major risks is the exposure of ICO to fraud or scam.
Indeed, since Initial Coin Offerings became popular, investors have been victims of fraudulent activities within the ecosystem. In the early days of coin offerings, investors were taken advantage of and it brought about a strict measure on their part to observe due diligence before investing in any ICO to reduce the risks of exposure to scam to the nearest minimum.
While the importance of due diligence cannot be overemphasized, it still boils down to the investors choice whether or not to invest in any particular ICO.
It’s quite understandable that people would react to the astronomical rise in the price of bitcoin and other listed altcoins on cryptocurrency exchange platforms. Their enthusiastic reaction is expected, however, it should be done with enough rationality. People don’t want to miss out anymore, – a term more preferably used is FOMO (fear of missing out); as they want to invest in the next potential ‘bitcoin’, so as to make huge returns on investment. Because ICOs often time offer a subsidized value of the potential worth of the blockchain enterprise, promoters think it is the quickest get-rich-quick scheme, undermining the disasters they may be exposing themselves to.
On the other hand, wannabe blockchain developers find impulsive and gullible investors as easy prey and con them of their hard earned currencies.
ICOs have now span every sphere of the economy, and with the rate at which this unregulated crowdfunding technique is currently being carried out, parading the cryptocurrency sphere, promising returns with global economic revolution, making it more difficult to keep up with genuine ICOs without caution.
No doubt, this new era of decentralized technology has potential, one that could truly cause a global financial and technological shake-up, however, most people have their focus narrowed to ‘profit’, neglecting the underlying cause, – decentralized ledger technology, and their application in real world scenarios. Which is mostly the reason why they fall prey to hollow projects. Many have had to quit their day jobs to attend to this investment opportunity squarely, despising warning from financial and investment regulatory bodies to be wary of such enterprises.
However, while it is a fact that ICOs can truly be profitable, one should approach the concept with caution and make the investment from a well-informed base. One may not know so much about the technicalities in blockchain technologies or how blocks are created, added and synchronized across multiple nodes, or what smart contract codes look like, how they are coded and how they are executed. But the other basic information about the startup can be gathered to ensure that one is not completely oblivious to the concept that is being sold.
Below are some of the highlights, which provide cautionary measures against scam ICOs:
Asking questions about initial coin offering is an important investigative procedure to determine the genuineness of the project. Whether you are a newbie or an advance cryptocurrency trader, all alike will ask questions to gain an edge over their ignorance about the coin offering. Once the baseline questions are answered, it leads to the next call for action. Questions are usually framed thus:
a. Its Concept: What is the project about?
Learning about the idea is the first approach, and the first series of questions would include: what do they intend to achieve, what problems are to be solved and how will they solve the problems. Underlining these questions, investors are driven to source for information either through their website, technical papers, social media pages and through review websites. The following are some of the key areas where answers to the questions can be found:
Goals and Objectives, looking through their documents, the goals and objectives of the projects are usually pointed out to help investors understand their vision and the concise version of the undertaken.
Technicality; whitepaper, proof-of-concept, Use-case / feasibility and Roadmap, all contain important data and say a lot about the enterprise. The white paper will show that the venture has a well thought through idea about what they intend to do. It usually contains the written explanations and other important information the investor might be interested in. Some even go as far as including snippets from their project source code or including graphical illustrations and flowcharts. This can be likened to the business plan in most contemporary real-world startups.
Proof-of-concept, where available shows the investors or audience the ability of the developers to pull through with the project showing an already existing prototype or MVP (minimum viable product) previously achieved by them.
The use-case and feasibility study help the investor to assess the team’s originality, whether the concept being proposed is feasible or already has competing demands; this way investors will be digging deeper to investigate what will distinguish this new product from others currently being established.
Moreover, every project should have a roadmap. A functional path the developers intend to follow to achieve milestones along the development stages. In any serious venture, the team will tell you where they are going, how they intend to get there, and what investors should look out for to prove they are succeeding.
b. Team: Who’s behind the Project?
Supporters of any venture should also look out for who the representatives are, their qualifications, their experiences – especially previously success in the same field, what social presence they have, and if the team comprises of any advisor and well-renowned expert in the field they have chosen to implement the blockchain concept. Also, partnership structure can say a lot about the tokenized asset.
If the project has been able to secure collaborations from experienced and already established blockchain business or prominent business figures from venture capital, then you know they have achieved a level of legitimacy.
c. What’s their economic structure?
The primary reason for initial coin offering is to raise money to kick-start a blockchain enterprise. Other than this, the intentions can be suspicious. You can go through their prospective financial scope; you can tell if the team wants to put their bellies before the blockchain. How they intend to distribute their tokens, what percentage of stakes the developers or presumed advisors have in the entire budget are all markers to look out for.
Moreover, how will investors contribute their funds? Is there an escrow system set or will they be using a smart contract with multiple signature wallets? Who will the escrow be, and what are the conditions for fund transfer between escrows and developers.
d. Do they have a social media presence?
In order to facilitate funding, blockchain startups usually source for funds and advertise their proposed venture on media channels, to include: Facebook, YouTube, twitter, telegram, blockchain forums such as bitcointalk.org, blogs like reddit, steemit, medium, and other local medias; look for periodic press releases, etc.
It is the responsibility of the investor to ensure they go through the various channels to see if the venture has an already established reputation, and what other investors are saying about them. Although it isn’t a wise investment choice to depend on what others say about an ICO, as there could be trolls who manipulate information just to promote the venture.
It’s a general rule never to invest more than you are willing to lose, therefore, if you consider the project and the amount they are offering as stakes in the startup, carefully observe the investment size. If it is outrageous, then you should consider investing as little as possible, while this is not such an effective direct tool in assessing the authenticity of a crowdsale, it does help reduce the amount of loss should the project turn out to be a scam ICO.
Remember that tokenization of digital assets, coin offering, and cryptocurrency so far do not have legal backing and money could be lost through wrong investment choice. While the developer’s aim is to raise money to facilitate the undertaken, the objectives should be clearly understood by the investor, and their roles in bringing about the success of the project should not be ignored.