In this article, you will learn the basics on spotting scams and fraud in the cryptocurrency space and what to watch out for.
ICOs (Initial Coin Offerings) are an exciting new way of fundraising. They are even believed to have the potential to replace the established venture capital-driven funding for startups.
However, there are also a couple of downsides to this development. Investing in ICOs is risky. Scams are frequent and sometimes it is really hard to spot dubious projects at first glance.
Thus a few words of caution: To make sure you invest into worthwhile projects only, learn to be aware of certain red flags that indicate that you should proceed very carefully with your investment, if at all.
You can ask yourself the following questions:
Do you understand the project?
Does the project have a real use case that you are also able to understand, or are they just using lots of buzzwords like AI, blockchain, decentralised, revolutionary, and such? If the whitepaper of a project conveys little information on what the real purpose of the project is and you are getting more and more confused as you dig deeper, then you should be on alert. Generally, it’s prudent not to invest in something that you can’t explain yourself.
Will the project potentially provide real value?
Does the project do anything of worth? If not, it probably won’t garner any traction. People will only buy something if it has value. Otherwise, what’s the point?
If things look fishy, they probably are
You have looked at the project website, checked out a video and read the whitepaper and yet you are still asking yourself what the whole project is really about.
If you have doubts, then it’s always a good idea to put the good old duck test to use: “If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.“ Sometimes, things aren’t more complicated than that.
Does the project really need a blockchain?
Can the project that the team is working on only be realised with blockchain? Or could the project easily be done without employing the technology? Make sure the project’s whitepaper clearly lays out why this specific project needs a blockchain and the actual part the blockchain plays in the development of whatever its future product is.
You want to look for projects to be truly disruptive in nature and directly applying the respective token with a unique service immediately after the ICO.
Who is the team behind the project?
Of course, people popping up out of nowhere with no track record in the industry can have ingenious ideas and could be busy with starting the next big thing everyone is talking about. However, it is also much more likely that you will be scammed by people you didn’t even know existed, rather than by well-known crypto entrepreneurs and developers.
The best news is if the founders are business-oriented and already successful in the industry - they have won awards, they run reputable and established businesses - you get the idea. You see their pictures and bios on the team section of the website and so on.
The only exception to this warning of anonymous actors is Bitcoin itself, which was created by Satoshi Nakamoto, who is still pseudonymous.
Do your own research
Don’t just believe random people on the internet, but do your own research on a project you are interested in. Read the whitepaper, read the posts on Medium, join official discussions on Telegram or Discord. Find out what you want to know.
Are there "dark periods" in the roadmap?
Regardless of how grand a project sounds and in which stages of development it is, a serious project should always have an up-to-date cohesive plan, clearly outlining all the stages of a project, including past and future objectives and milestones. If a road map seems shady or fuzzy, something’s probably amiss. Once again, make sure you do your research.
Are the founders engaging with the community?
We all know that project founders are usually very busy people. In turn, a passionate and engaged founder knows that authentic engagement with the people they serve is essential. Professional founders of reputable projects will make sure to keep the information flow going. If you can contact the founders directly via Telegram or another social channel, even better.
Professional founders tune in at regular intervals to inform the community about the latest project developments, changes and so forth. In other words, they take valid community engagement seriously. If the founders keep themselves covered and there is no sign of them, there is probably a reason for this.
Keep in mind that despite a project meeting all important criteria, unfortunately there is still no guarantee that it will be successful. However, being careful does make it a lot easier to avoid most of the shady ICOs built on hype and to recognise scams on time. By recognising scams before you fall for them, you are much more likely to invest into an ICO worth your time and investment.
Watch this Bitpanda Academy lesson as videoWatch on YouTube
New to Bitpanda? Get started today!Sign up here
This article does not constitute investment advice, nor is it an offer or invitation to purchase any digital assets.
This article is for general purposes of information only and no representation or warranty, either expressed or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, completeness or correctness of this article or opinions contained herein.
Some statements contained in this article may be of future expectations that are based on our current views and assumptions and involve uncertainties that could cause actual results, performance or events which differ from those statements.
None of the Bitpanda GmbH nor any of its affiliates, advisors or representatives shall have any liability whatsoever arising in connection with this article.
Please note that an investment in digital assets carries risks in addition to the opportunities described above.