The cryptocurrency market in its current state is mouthwatering to investors — and to scammers. Like a box of brownie mix, it promises fast returns with little effort. So many people think they could be the next to strike it rich that investors poured more than $6.3 billion into initial coin offerings (ICOs) in just the first quarter of 2018. But when investors become more focused on FOMO than the tech, scammers can easily take the money and run. How can you avoid becoming their next victim if you want to invest in this market? Look out for these danger signs.
Someone is selling tokens for a new platform. Vitalik Buterin consulted on this new platform. Andreessen Horowitz and Sequoia Capital made pre-ICO investments. Would you want to buy it? The inventor of Ethereum blockchain and two of the biggest names in venture capital believe in this new platform. That’s a great sign, right?
But how do you know those entities have really invested? Do they even know that the ICO you’re considering exists? Anyone can put someone else’s headshot or company logo at the bottom of their website and claim an endorsement. You want credible, third-party sources to back up what the development team that wants your money is telling you.
In late May, the Securities and Exchange Commission (SEC) announced charges against Titanium Blockchain Infrastructure Services, which raised as much as $21 million in its ICO earlier this year. The charges are tied to Titanium’s lies about business relationships with the Federal Reserve, PayPal, Microsoft, Intel, and others.
Part of your due diligence as an investor is verifying the claims on the website. Look for news from reputable outside sources. Look for mentions of the token, platform, or company on the websites of those they claim as partners, investors, or consultants. Don’t take ICOs’ website claims as gospel.
Fake Founders, No Founders, or Anonymous Founders
It’s all too easy to gather stock photos of business professionals online, perhaps modify them slightly, and put fake names and bios beneath them to create the appearance that a new coin has a top-notch team behind it. Alternatively, some steal the headshots and bios of real professionals and claim that they’re involved in the company when they aren’t. And furthermore, diligent scammers even create fake LinkedIn profiles for their founders and key team members because they know that numerous articles advise potential ICO investors to check for detailed professional histories as a way of vetting the ICO.
Go ahead and check those LinkedIn profiles, but go beyond that and look for news stories in reputable publications talking about those individuals and old press releases from the websites of each team member’s former company to check their backgrounds. See if you can find them in talks, conferences, or webinars uploaded to YouTube. While you’re at it, look for reputable news stories about the new project. Finally, see if the individuals’ backgrounds give you confidence that they’re well suited to a role in crypto. Real professionals with real experience leave digital trails that are difficult to erase and even harder to fake.
Sometimes a reverse Google image search reveals fake photos, though other times the image files are integrated into webpages in a way that doesn’t allow for this technique.
If the platform holding the ICO doesn’t name any founders at all, that’s a really bad sign — but also an obvious one. Don’t invest in a project that no one has put their name on.
A celebrity endorsement does not automatically make a cryptocurrency fraudulent. But celebrity endorsements can lend credibility to an offering and blind potential investors to the need to perform their own due diligence. So, when a celebrity says they support a cryptocurrency, not only should you still thoroughly research it, but you should investigate the nature of the celebrity endorsement as well.
The most untrustworthy endorsements are undisclosed paid endorsements. By their very nature, you have no way of knowing about this type of relationship. It may be illegal, too, the SEC states.
If you need further proof of bad celebrity endorsements, look at the 2017 Centra scandal. Floyd Mayweather and DJ Khaled supported Centra, whose founders raised $30 million in 2017 despite having no experience in virtual currency and whose chief executive, along with several employees, appears to have been fabricated. Centra, which planned to offer a virtual currency debit card, also boasted of a false relationship with Visa.
No White Papers or Plagiarized White Papers
Initial public offerings of stock use a prospectus to inform potential investors about the company and the investment. Initial coin offerings use white papers, which have been a standard in the industry since the days of the cypherpunks in the 1990s. One of the most famous whitepapers in the crypto space is Satoshi Nakomoto’s 2008 bitcoin whitepaper — which, by the way, was not selling anything, only describing a new technology.
These days, if you’re considering buying a new token, you need to read the white paper that describes it. Here’s what to look for:
Simply cutting and pasting key sentences into Google may be enough to turn up copies. You can also take things a step further by using a plagiarism detector such as Copyscape.
- Poor value proposition
Will decentralizing and moving to blockchain actually improve or enhance this service in any way?
- No proof of concept
Has the development team produced a minimum viable product? Have they demonstrated that they can pull off the project they’re raising money for?
Additionally, look for other warning signs like buzzword stuffing, no roadmap or an overly vague roadmap, unrealistic goals, and the absence of a GitHub code repository (or a repository that hasn’t been recently and regularly updated).
No Soft Caps or Hard Caps
A legitimate ICO should have a soft cap: a minimum fundraising goal, an amount needed to get the project off the ground. Look for an explicit disclosure that all coin purchases will be refunded if the minimum goal isn’t met. A hard cap, a maximum point at which fundraising will be complete, is also essential. A team that seeks to collect unlimited funds doesn’t have a clear plan on how it will use them.
SEC uses fake ICO to educate investors
The U.S. Securities and Exchange Commission in its quest to ensure investors can identify fraudulent initial coin offerings, recently launched a mock ICO called HoweyCoin. The site redirects visitors who try to buy HoweyCoin tokens to the SEC’s education tools about the signs of fraudulent ICOs.
Bottom Line: Protect Your Capital
As a recent Wall Street Journal study found, “plagiarism, identity theft, and promises of improbable returns” are widespread among cryptocurrencies. Of the 1,450 its team analyzed, the Journal found serious problems with 271 of them, putting $1 billion in investors’ funds at risk. Heed the warning signs listed above and do your own research.
Further, keep in mind that just because another site lists a particular crypto as not being a scam doesn’t mean it’s trustworthy. That site may be in on the scam, or its publishers might have been duped themselves. Be mindful of the reputation and security of the exchanges you use, the vulnerability of coins to pump-and-dump scams, the machinations of hackers, and the possibility that even legitimate ICOs can have fatal flaws in their code (see the DAO). Finally, don’t fall for the promise of guaranteed returns: you know better.
The information in this article is for informational and educational purposes only. Investing in ICOs, cryptocurrencies or tokens is highly speculative, and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.