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How to avoid buying into an ICO or Token Sale that is destined to fail
An Initial Coin Offering (ICO) is an easy way of investing in a blockchain-based project that is still developing. With good research, intuition, and luck, you may buy into a future cryptocurrency with global recognition. The next ICO could be the one that brings you a substantial ROI. However, it could also be one of the many that fail or turn out to be a hoax.
Despite their continuous loss of credibility, ICOs remain widely popular. Today, we focus on the giveaway signs of failing ICOs and how to spot them a mile ahead.
What is an ICO
An Initial Coin Offering (ICO) is a fundraising method companies use to build financial and user support for an upcoming blockchain project.
The ICO is the favorite tool of startups to attract capital for their first projects, especially because they have to battle anonymity. First, they start with a whitepaper detailing the roadmap of the project. Next, they sell coins in return for the necessary funds to turn them into a real things. In the end, the investors can keep their tokens, sell them, or exchange them for other cryptos or fiat money.
ICOs are the first fundraising strategies that appeared in the world of cryptocurrency, and they follow similar rules to real-world Initial Public Offerings (IPOs).
Are ICOs still worth buying?
In recent years, we have seen the development of Security Token Offerings (STOs), which proved to be more advantageous and less risky than ICOs. However, even Initial Exchange Offerings (IEOs) garnered more investors’ support, even if their results were unsatisfactory.
Still, Initial Coin Offerings remain a viable source of crowdfunding for companies and feasible addition to your portfolio. As long as you do your due diligence, you can identify potentially successful ICOs with stellar benefits in the long run.
Some of the best advantages that ICOs have to offer to include the following:
- Fast-selling ICOs can help projects develop quickly.
- Investors get a clear view of the roadmap ahead.
- Unfortunately, the token prices are usually dismal and available for most crypto investors.
ICOs are still popular, also thanks to a history of successful projects. Some developed into world-renowned enterprises that brought significant profit even to the smallest investors who decided to bet on them from the start. However, the ones who failed to read into their potential still lament their lack of intuition.
The risks of investing in an ICO
Despite their current success, notable projects based on Initial Coin Offerings do not guarantee the same progress for other ICOs. It takes plenty of research, experience, and intuition to understand the difference between a potentially high-rewarding ICO and one that may be camouflaging a scam.
Some of the biggest risks of buying into an ICO include the following:
- ICOs are not fully regulated in numerous jurisdictions.
- The high number of ICO proposals increases the risks of fraud and scams.
- Once they hit the market, the tokens may lose most of their value due to intense volatility.
In recent years, the crypto community has witnessed several fraudulent ICOs, and investors have grown worrisome and reluctant to invest in such projects.
Some of the most famous ICO scams include:
Ifan / Pincoin
In 2018, a company allegedly based in Dubai and Singapore proposed two projects called Ifan and Pincoin for ICO. Through their Vietnam-based representative Modern Tech they managed to dupe more than 32,000 investors into funding a future Ethereum ERC-20 token in exchange for returns of up to 40% per month. However, one day, the developers quit the projects and disappeared with more than $660 million.
The Times called OneCoin “one of the biggest scams in history.” The Ponzi scheme developed by two Bulgaria-based off-shore companies managed to get away with more than $4 billion amassed from investors between 2015 and 2017.
OneCoin pretended to sell educational packages that would also come with digital tokens called OneCoins. Investors were allowed to “mine” for them on two websites based in Bulgaria and Hong Kong. They could also exchange them for fiat currency, EUR in this case, on the company-powered OneCoin Exchange, which robbed everyone of their money when it suddenly closed in January 2017.
To this date, the authorities have managed to catch, trial, and imprison most of the people behind OneCoin.
Today, most people remember Bitconnect for the memes that one of its investors inadvertently generated during their first (and only) annual ceremony in Pattaya, Thailand.
However, between 2016 and 2018, Bitconnect managed to fool investors worldwide with a Ponzi scheme that authorities saw from afar but could not prove. As a result, its native token, the Bitconnect coin, went from a post-ICO price of $0.17 to an all-time high of US$463 in December 2017.
A month later, Bitconnect suddenly shut down. While the authorities managed to catch most of the perpetrators, almost $2.6 billion were lost forever.
How to avoid investing in a failing ICO
Even if ICOs have been the subject of massive scams in the past, it does not mean that you have to discredit all the projects that use this capital-raising method. If you are keen on investing in a platform that uses ICO to kick-start its activity, you should use these simple but effective preventive measures:
Research, the development team
The first step to understanding the potential of an ICO-based project is researching its developers. If they are anonymous, you should stay away from them. Likewise, you might want to look elsewhere if they are associated with shady ICOs that have previously failed.
Check the news
When a company issues an ICO proposal, the news spreads through the cryptocurrency community almost instantly. You can find analysis, forecasts, and experts’ opinions on the upcoming project with some research. As a result, you can easily determine if the project is worth your money.
Analyze the whitepaper
Every blockchain-based project that starts with an ICO has a well-structured whitepaper. In this document, you should be able to identify whether the roadmap is realistic. In addition, you can evaluate the quality of the code and determine if the terms and conditions are feasible for the project’s long-term evolution.
Engage in community discussions about it
Last but not least, you should talk about it with other crypto community members. Then, contrary to a few years ago, more investors, experts, and commentators can offer their honest opinion on the ICO you are willing to fund.
The Bottom Line
In the end, buying into an ICO brings the same risk of failure that most financial ventures pose. It would be best if you had a good understanding of the cryptocurrency market and the industry’s developments to have a higher chance of investing in a potentially successful project.