Welcome to the wild west.
Because ICOs are such a poorly regulated way to raise large amounts of money, some have given the term “The Wild West” to ICO investments. Some reports estimate that, 80% of them have been scams that altogether have conned people out of 1.7 billion US dollars.
There is so much money being lost in ICO scams that the SEC decided to create their own spoof of a scam coin, in an attempt to educate people about doing due diligence before buying into an ICO.
Investing becomes a little tricky when you have all these shysters running around trying to dupe the naive and inexperienced. 80% chances of falling victim to a scam are very bad odds to play, so it’s the aim of this article to equip you with some knowledge that might make picking a good ICO a little easier, and a little safer.
First, let us start with the problems behind ICO scams, and the real problem comes from us, as investors.
We want easy money
What could possibly be attractive enough to retail investors that they would cumulatively give $1.7 billion to scammers? It’s the promise of easy money.
Media loves shilling coins at the top, like this article written by Forbes saying, ‘if you bought $100 worth of XRP, you could have made $35K.’ People read that and think, “I could have invested a THOUSAND dollars! Or more!” Then they start doing the math in their heads, and pretty soon they get very excited.
It’s called fear of missing out (FOMO). Investors rush in to buy the next hot ICO, and sometimes they even win big. Then, caution and preparation get thrown out of the window and they start to think they’re geniuses, and that nothing could go wrong.
In the words of Warren Buffet, “nothing sedates rationality like large doses of effortless money. ” Wanting to be the next millionaire, people pour their earnings into ICOs, only to get scammed and lose it all.
As you go forward with your investments, try to keep in mind that the ICO odds are stacked against you. While it is true that not all of them are scams, remember that even legitimate projects fail.
Fortune tracked over 900 different ICOs in 2017 and found that roughly only 40% of them were successful (meaning 60% were unable to hit their dollar target, or did not end up getting listed on an exchange).
To date, the two biggest ICO scams combined (Pincoin and Ifan) conned roughly 32 thousand people out of $660 million dollars.. That comes out to an investment of $20, 625 USD per person. That does not sound like they were position sizing. When it comes to trading or investing, risk management should be your #1 priority.
One of the more famous Ponzi schemes is OneCoin, which funnelled at least 350 million dollars through Germany.
There is almost no investor protection
Yes, there are laws in place to protect investors, and yes, it is possible to take a company to court, but ruling on an unregulated ICO is very difficult, especially if the ICO operates from abroad. Since crypto is a free market jungle, your best defence is due diligence, risk management and taking responsibility for your investment decisions.
With very few exceptions, all the money that gets stolen stays stolen.
It’s insane to think that just 3 ICOs account for over a billion dollars of stolen money. This might cause someone to think…
We sometimes blindly throw money around
Some scams are very professional looking, as in the case of Ifan. Take a look at their website (since it’s still up and running). It’s surprisingly good. Some of these scammers have spent tens of thousands of dollars on their websites and videos to make them look as professional as possible. So it’s not always the investor’s fault, because the scammer makes it look so legit.
Some are obviously fake projects that still manage to siphon money out of peoples’ pockets. UET is a great example.
UET stands for “Useless Ethereum Token,” and they managed to pull in $40,000 in 3 days through their ICO. All over their website they make references to how there is no value proposition, that you will get nothing in return, and that 100% of the funds are going to buy electronic devices for themselves.
And they still managed to raise $40,000 USD.
It’s almost as if people are not even looking at the website before clicking “buy now!”
We aren’t doing enough due diligence
Do your homework using these 4 tips:
- Read the whitepaper. As you read it, be on the look out for 3 things:– promises of fast, easy money. That is a huge red flag right there.- meaningless fluff words. If the whitepaper you are reading uses 10 pages to talk about the “blockchain industry,” consider that to be a red flag. Keep in mind that there are professional writers who will write a whitepaper and fill it with fluffy buzzwords to make it sound attractive and professional. Look for clear, detailed explanations about how the token and network will function. A whitepaper is supposed to be a report giving information, or a proposal on an issue. If you read the whitepaper and the purpose of the project is not clearly and quickly identified then consider that to be a red flag. Remember that the Bitcoin whitepaper was 9 pages and was succinct and to the point. There were no buzzwords or talk about ROI. It was purely technical.
- Investigate the team. Sometimes people use fake linkedin accounts, or use fake photos. Double check that those accounts are real, and that the people on the advisory board have confirmed their participation in the project. If you can’t find anything on Twitter, then consider contacting them. It does not take a lot of effort to email and confirm that their involvement is what the project website claims it to be.
- Does the project have a working product? Buying into a great-sounding whitepaper with no product behind it almost always leads to a loss of money. When looking at ICOs, make sure that they have a product already launched.
- What problem is the project trying to solve? Does it offer anything new and innovative to the industry. The truth is that many people are raising money for useless DAPPs that don’t have any real world demand or even need to be decentralized.
Investing has risks, but ICOs can be riskier than any other opportunities out there. In fact, it may be smartest and most lucrative to take a sizeable portion of every win you make in the markets and place that in a more traditional stock market. At least with stocks you’ll own equity in a real world company, rather than vaporware with no proven business model.
But if you cannot be dissuaded from participating in an ICO, make sure to do your due diligence, and do not rush into any project. Know yourself, watch your emotions and exercise generous amounts of patience before you deploy your capital. Be very skeptical of everything you read. Otherwise, you could lose big.
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