Pitfalls of ICOs & Popular Scams Every Investor Should Know

ICO Investments and their Potential Disadvantages

If you’ve decided to become one of the ICO investors sooner or later, make sure you are aware of ICO scams and its possible disadvantages. Lately, cryptocurrency is being routinely discussed all over the world on all the financial and economic platforms, behind which the very obvious reason is spectacular rise in Bitcoin’s price during the last year.

Basically, initial coin offering or ICO is one of the high-risk fundraising methods in which future crypto coins are traded against cryptocurrencies. These crypto coins worth rapid and high liquid value for all stakeholders of a particular project. Whenever a new company or a startup is initiated, just like IPO (Initial Public Offering) – ICO is arranged for the general public. The only difference between these two is the regulation by some financial institution, which is not present in ICO’s case – making it vulnerable to investment scams and frauds.

Develop an Understanding of ICO Fundraising:

The private investors both big and small are encouraged to participate in ICO fundraising scheme of the project. The biggest attraction for ICO investors is the price of token or virtual coins on which they bid, that doesn’t remain same before and after buying. This is how capital is generated for new blockchain-based businesses while buyers being optimistic, hope for substantial growth and profit margin from these disruptive decentralized platforms.

“Since this billion-dollar industry is not regulated by some financial institution, it poses high risk of losing all the money and initial investments.”

In contrast to crowdfunding campaigns, the capital raised by ICO belongs to investors and they expect a high return on their investments. A specific part of cryptocurrency is kept saved for backers which is then sold in exchange for either traditional currency or Bitcoin. When company launches a fundraising campaign (unregulated), it issues a whitepaper that outlines the project details like scope, timelines, amount of capital invested and type of currency it deals in. Just like IPOs are meant for potential investors, similarly ICOs appreciate capital investments largely from project supporters.

Nevertheless, the success of ICO phenomenon that is supposed to raise large amounts of money by unregulated markets, buyers and project developers is critically questioned. If you being one of the crypto enthusiasts consider an investment, it’s crucial to bear in mind the potential risks associated with initial coin offering scams and frauds.

ICOs Investments: Common Pitfalls & Risk Indicators:

Trading of cryptocurrencies is considered a high-risk activity, and due to lack of regulation ICO markets are at the mercy of scammers and fraudsters. That’s why there are several risks associated with buying and trading of cryptocurrencies. For instance, a group of scammers may attempt to play with the price of Bitcoin to a certain point to sell their full interest. In this way, backers who have purchased cryptocurrency will face decrease in its value and eventually loss in their investments. This fraudulent behavior has pushed many governments to take serious action against ICOs and put regulations whilst few have announced it as an illegal process.

For example, US has been taking step against cryptocurrency trading and use of bitcoins; whereas World Crypto Index indicates that China has not only banned cryptocurrencies trade in its country but ICO is considered as prosecutable offense by the government.

Popular ICO Scams:

  1. Consider a less popular incident of Mycelium ICO, when its members just vanished after raising huge capitals. Later, it was revealed that they consumed all the funds to pay for their personal vacations.
  2. Likewise, $7 million was reported to be stolen as CoinDash’s ICO initiated because the website was hacked and hackers changed the ICO wallet address to their IP.

Many companies claim that their platforms can be auditemod by investors because they use the blockchain technology. In reality, it proves a false claim when it comes to their infrastructure issues and securities vulnerabilities. Hackers and scammers can break the code by hitting into programming. Therefore, auditing security measures need to be done in order to prevent hacking of ICOs and their clients.

How to Make ICO Investments Secure ?

ICO is a still multi-billion-dollar industry and thousands of investors are looking for potential opportunities to earn high returns on crypto investments. During the recent years, initial coin offerings have reported being very successful and raised million dollars in just weeks. Among popular ICOs, Neo, Ethereum, EOS, and Stratis are notable till date. It is important to analyze positives and negatives before investing in ICOs and never invest anything you can’t afford to lose.

ICO investments can prove much profitable if investors keep themselves aware of scams and invest only in reputable platforms.  In order to make ICO investments safe, investors and buyers of cryptocurrency need to be well-informed about the market and all the warning signs that appear during the process. Here we’ll pinpoint every place where you can possibly find the chance of crypto scam or a fraudulent dealing.

Check Project’s Website & White Paper:

Before launching an ICO scheme, usually the start-ups issue a white paper in order to guide investors about project’s outline. This piece of whitepaper directs investor why he should invest and benefits of investing in the project. At this point, investors need to carefully go through all the project details and observe the whitepaper for any kind of copy-pasted or fake information.

Also, check credentials of previous investors that are placed to attract new investors. Usually, scammers overlook to publish whitepaper and even if they do, most probably they will skip minor details that really matter to the savvy investor. So being a one, you must analyze project’s website and whitepaper to inquire about the credibility of ICO.

Investigate Project’s Legitimate Status:

In the same way, investigate for the team members and developers behind the project. Check for the legitimate status because valid and credible ICOs share a proper communication channel to gain investors trust and make them aware of the offerings. Since scammers fear held accountable in any way, they tend to avoid naming or listing anyone’s name associated with their offered ICO. If you find whitepaper’s information unconvincing or non-reliable, it’s a clear indication that backend team is planning to make quick money.

How Does a Credible ICO Look Like?

A reliable and trusted ICO platform must provide a clear road map where it intends to take the company in coming years and what’s its ultimate goal. Another sign of scam ICO could be pre-mined tokens that company might have reserved for themselves to gain short term benefit. To investigate this doubt, an investor must keep an eye on project’s scheduled distribution of tokens.

Usually, in pre-mined tokens are issued to a group of people consisting of early developers and investors before the actual sale of tokens to the public. It is seldom done as favoritism to desired persons, so investors must consider inappropriate distribution of pre-mined tokens as an alarming signal. Furthermore, if hierarchy of ICO project motivates people to host new investors in return for reward, and the structure is like a pyramid, it provides enough evidence to abstain from investing.

Final Word:

In spite of above arguments, it is still considered that ICOs can be an effective way of raising funds for a startup or a new business if conducted legitimately. By generating capital through ICOs, companies can grow faster and so offer healthy returns on shareholder’s investments.

The only condition is to mitigate risks of investing in ICO schemes and frauds linked to crypto stocks. However, investors and marketers must do their research to make investments secure and avoid being prey to ICO scammers.