What are the red flags of an ICO exit scam?

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In 2017 and 2018, millions of dollars were lost in the flood of fake offerings leading to ICO exit scams which resulted in the blockchain technology gaining negative reputation. This eventually led to credibility damages of the cryptocurrencies and blockchain.

However, blockchain is still considered as the best solution to all the mess that has been created in the internet for the last decade. This is because, with only a few companies controlling the online information, having a decentralised model is holding a great appeal to a large number of Internet users.

Now, the question that arises is, what exactly is an ICO and how can one tell whether it is a scam or the real deal?

What is an ICO?

An Initial coin offering (ICO) can be defined as a form of raising funds utilising blockchain technology. 

The main reasons why companies choose ICOs over other forms of funding include;​

1. Through an ICO, money can be raised without losing any of the company's ownership as backers do not receive any of the company's shares.
2. ICOs offers entrepreneurs an alternative to the rigourous processes involved in raising funds. Since such process do not have to undergo the standardized processes and have little to no regulations in certain countries, fundraising is made as easy as launching a website.
   

How does it work?

Similar to a crowd funding campaign, enthusiasts of the project purchase the distributed cryptocoins which are also known as tokens. This purchase is usually done using cryptocurrencies or fiat.

The success of an ICO company is measured by meeting a certain fundraising target within a specified timeframe. If the target is met, the campaign is considered successful and vise versa.
However, when the ICO campaign is successful, the fundraising startup then moves on to the execution stage of the project. Here, backers now wait for the value of their tokens to rise or skyrocket.

Despite the relatively lenient and straight-forward methods adopted by ICOs, such offerings have their share of disadvantages:

• While it is becoming a favourite for many companies, the rise of ICO scams has not only hit individual pockets but also the reputation of blockchain has been widely marred. As a matter of fact, countries such as Nepal, China and Bangladesh have banned ICOs completely. Other nations have imposed much stronger regulations for raising money on the blockchain.
• A number of fraudulent campaigns were inspired by the lack of regulations around ICOs. It is alleged that over 80% of ICOs were scams with the biggest ones raising $660 and $600 million in 2017.
• The fact that it is not always easy to spot exit scams is also another problem that ICO faces. Crypto newbies are advised to refrain from investing if the business model or the product itself is unclear. When considering an ICO investment, promises of unrealistic return on investment or outlandish claims about the product are the major red-flags that should never be ignored.

Having gone through the cons of ICOs, one might ask whether investing in ICO is safe or not. It is worth noting that the chances of return on investment appear to be very slim even though the legitimacy of an ICO can be proved.

Considering that the blockchain technology is still in its teething process, and the fact that ICOs regulations are far from being comprehensive, investing in an ICO campaign still remains a great risk.

With the practical adoption of blockchain technology remaining low, blockchain startups are still struggling to succeed. This gives no guarantee that your tokens will ever amount to anything despite having invested in a promising project with a whole team of reliable people behind it. The failure of many legitimate projects are a result of not having enough understanding of the technology and what it can do for the customers. It is therefore advisable to do thorough research on the business model, product and even the team behind the startup before investing in an ICO. This way, the risk can be minimized.

As all other form of investments, the value and successful redemption of the tokens can never be guaranteed. It is for this reason that ICOs are to be selected with extreme caution and risk-assessed without ignoring any red-flags.

​For further information regarding ICOs and respective VFA legislation contact us by following the link.

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