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What tricks do scam ICO use to fool investors?

Posted Mar 8, 2018

Choosing the right ICO to invest in is as hard as avoiding the wrong ones too. As there are many new projects being frequently released regularly. It’s almost as if each day has a new product to be released.

It’s not hard to imagine that people will want to take advantage of investors who have been drawn to the peculiarity of blockchain technology and its ingenious science. ICOs have taken so much of the center stage in internet marketing, investments and has ultimately spread its influence to venture capital.

With the spotlight on initial coin offerings, especially how they have raised billions of dollars within a short period of their existence, many fraudulent projects have emerged alongside the genuine prospective ones, which have made it even more difficult to trust the tokenization of digital assets, thereby limiting its potential.

We can describe a scam as a premeditated endeavor to lure investors to buy-in into a particular token with the aim of defrauding them by asking them to send funds (fiat or cryptocurrencies) to a designated wallet – which oftentimes is not escrowed.

Scam ICOs can come in two forms. One, when the ICO itself is a bogus entity having nothing of value and they intend to make away with investors’ funds; two, when hackers try to parade themselves as representatives of the real deal, they divert the attention of the investors from the real project unto a mirror image.

Some of the well-known tricks used by fraudsters include:

Outrageous objectives and hype

Virtually everything wants to be on the blockchain these days, and it is quite hard to picture anything that has not been ‘block-chained’. Sincerely, most of these products don’t need a decentralized mechanism before they can implement the solutions they want to provide.

And sometimes, it’ s just an easy way to lure people in. as long as you can mention blockchain on your website and a couple of places in the whitepaper, you’ve caught the attention of ignorant investors.

Oftentimes, these are carefully planned. They would provide an elaborate plan on how to address a problem and would convince you that the blockchain can solve it. In the end, the sad story is that they may not get the required assistance that is required by the elite members of the cryptocurrency hub but will run away with the few investors who have unknowingly been duped.

People who tend to invest in tokens that are highly hyped may soon discover to their own hurt that these so-called digital assets may have been created just to loot from investors after all.

Fake/Phishing websites

Some of these fraudsters come as affiliates to real projects. What they do is to duplicate the resource platform for the token sale event, social media accounts, website URL addresses, contributing/token sale addresses, and go as far as posing as one of the members of the team to intercept donation from potential ICO participants.

They do so by sending the wrong contract or receiving addresses to the investors for deposit of funds. Others have been known to carry out activities that are not sanctioned by the original project itself, like conducting a presale when the real ICO had stated clearly that they would not be doing one.

Bogus team structures

In the early days of token sale events, some people would disguise their project by inserting the profiles of reputable individuals as members of the team, and oftentimes, these individuals were unaware of the tokenized asset nor were they affiliated with any member of the team behind the act.

It used to be a bold act to put up the professional profiles of these individuals, such as their LinkedIn profile as a cover-up to make up for their laxities in experience and lure people to believe that the platform had some credible backers behind the project.

No smart contract address or related source codes

Before the advent of smart contracts, it was pretty hard to know which ICO was genuine and would not run away with your investment, and the stroke of luck didn’t always favor unwitting investors; as they fell prey to the gimmicks of ICO tricksters.

However, when smart contracts came into being, it made it a little easier to avoid simple trickeries like when a project claim they don’t need smart contracts to send tokens to their clients, and that once the investments are deposited the tokens would be sent on a later date.

These days, anything void of escrows or claiming that they are not needed or even the absence of the mention of smart contracts and references to their hosted source codes tend to trip a lot of alarm bells.

Guise as Ponzi

Another very common practice is that many scammers are well aware that most people will participate in initial coin offerings because they want an astronomically high return, and then they give them just that. The blow the economic evaluation out of proportion and promise huge returns on capital within a short period of time.

Some go as far as predicting how much the tokens will be worth when they hit the exchanges. A lot of other good projects may have made this mistake though; it is still mostly practiced by pyramid schemes. The problem with pyramids is that one person gets richer at the expense of the so-called ‘investors’ especially when they are unaware of the project details.

Fake volume

Some dubious developers will create fake deposit volumes to deceive people into thinking that funds have been raised during their crowdsale or that a whale has decided to invest hugely in the token. This becomes sort of a ‘contribution proof’ so that investors will not think that no one is interested in the product.

You can check the contract address for the project, and if anything shady stands out, note it among other things before joining the project.

Initial Coin Offering exit scam

There is a third category of scammers – the ICO exit scammers, this set uses long-term trickery to gain the trust of investors get listed on exchanges and vanish into thin air after several complaints of technical glitches or legal anomalies that are insurmountable.

I would say that they are the worst of them all, because you don’t see these ones coming as they tend to pass the basic tests; they may have credible people on the team, good construct of the web particulars and social media profiles, a very convincing whitepaper draft, and to some extent a scalable approach.

Other things that could probably be pointers to tricks being employed by scam ICOs will include, fake addresses, lack of credibility in the eyes of elite blockchain adopters, scarce to zero presence of press releases and update on their activities.

How to make a decision?

In conclusion, it would be prudent of you to assess the ICO first before investing. I recommend two approaches, divide the project into technical and economic value. This way you can ascertain whether or not that particular ICO is worth your while.

The technical value will help to evaluate the tech aspect, even if you are not techy, you can get help from GitHub, or related forums where the source codes and smart contracts are broken down. More so, it would help you know if some other project’s white paper was copied.

The economic perspective will help you evaluate the economic plans and prospects for the project. If you find that the team is desperate to rush the ICO and also trying to use hype and FOMO as an instrument to drive their token sale event, then you should be careful, it’s an outright scam.

If the development team also gives speculative USD values of their tokens even before concluding their TGE event, something is definitely not right there; after all, the price is usually determined by the market. And lastly, research the team members and the claim of advisors to know if there is any genuine or real affiliation with those in question.

Usually, these fraudsters will scrub their identity off the internet so that they will not be traced and should they have a need to repeat the scheme, they would have a fresh audience. And do note that each time, they would get smarter and try a different approach. As an investor, you need to be on your guard at all times to ensure you don’t get sucked in.