Cryptocurrencies present a great investment opportunity for people from all walks of life. However, there are a few risks associated with investing in the growing ICO market. A market that has grown so large in such a short amount of time will inevitably have some faults. In order to achieve the best possible outcome in the growing cryptocurrency market, you must understand these risks.
If you’ve kept up with recent news, then you have likely heard of a few ICO scams. Unfortunately, they have been growing in frequency. In fact, Facebook has already banned ICOs from advertising on their platform, and multiple countries have banned them altogether. Despite this and all of the negative press, ICOs continue to come out, and altcoins continue to thrive.
Why Have ICOs Gained An Ominous Reputation?
The simple fact of the matter is that most people who try to delve into cryptocurrencies don’t know what they’re doing. They are just trying to get into the crypto game before it’s too late so they can cure their FOMO (fear of missing out). There are quite a few traps out there that were created with this in mind. So, what can you do to avoid getting burned?
The first step in avoiding unnecessary risks is to educate yourself. If you are considering investing in an ICO, you should be careful and do your due diligence and research the subject of your investment. You should follow reliable sources and avoid relying on your gut feeling alone. These reliable sources can be the big-name news sites in the crypto space, such as Coindesk and CoinTelegraph, or famous blockchain developers working with cryptos.
A good first step would be to read blockchain and cryptocurrency-related tutorials to build a strong foundation of knowledge that will help you determine which ICO claims are realistic, and which are too good to be true.
Follow Cryptocurrency Experts
While you can read a lot on the internet, if you are reading this right now you likely know that there are many people out there who know a bit more than you. Fortunately, there are many people in the crypto world that have gained reputations for providing high-quality information to their followers, helping them to avoid scams. As with many other things in life, it is not always a bad idea to follow the crowd. Just make sure it’s the right crowd.
One thing you should be aware of when gathering information about ICOs from crypto influencers and websites is that often these sources can be paid to promote certain cryptocurrencies.
Some examples of well-respected figures in cryptocurrency are:
- Vitalik Buterin – Ethereum co-founder
- Andreas M. Antonopoulos – Bitcoin expert and enthusiast
- CZ – CEO of Binance
Learn To Detect Red Flags
So, How Do You Know If An ICO Is Legitimate?
The easiest giveaway of an ICO scam is a lack of transparency surrounding the project and its development team. If the development team is not at all known to the crypto community, then it is likely a scam. Worse yet, if the development team is entirely anonymous, then you’d better watch out.
It is critically important to see the faces behind an ICO, and it is preferable if these faces stand to lose credibility if their project fails. If the developers are respected members of the cryptocurrency community with a high level of visibility and/or a career on the line, then it makes sense that they would be highly unlikely to scam you.
An ICOs legitimacy comes from transparency and credibility. If the people behind a new ICO have put something valuable on the line, then they are likely to have worked quite hard to ensure that their new blockchain project will be a success. Check their social media, and any information you can find on their professional work and achievements. This is another area where following the news pays off.
No Money Raised
Don’t be the first idiot to invest in a scam or failed ICO. This red flag is very easy to spot. Even if the ICO looks good, an ICO with potential should have a few high value investors or influencers behind it if it’s going anywhere.
Too Much Money Raised
A good and honest ICO will ask the public for the amount of money they actually need to get their project rolling. This amount is generally between $5-$25 Million USD. An ICO that sets its hard cap to a ridiculously high amount likely just wants as much money as they can get. The catch is no one can guess exactly where all that money will go.
No Discussion Channel
A scam ICO doesn’t care for any concerns or feedback. While an active discussion channel is no guarantee of legitimacy, it should be a prerequisite nonetheless.
Examples of Scams
An exit scam takes place when the money that is raised for an ICO or a pre-ICO sale goes missing and the team behind it disappears. One of the most notorious examples was Bitcoin Gold. The website managers of Bitcoin Gold took off with over $3 Million worth of (actual) Bitcoin and other cryptocurrencies. This is why the reputation of, and level of investment from the development’s team in the crypto space is so important.
One of the most common scams is the exit scam where a crypto scammer convinces unwitting investors to invest in fake coins. These coins are traded for fiat currencies or other cryptocurrencies. One of the most comical examples of this was the aptly named PonziCoin. PonziCoin was a real gag cryptocurrency that advertised on its website that it is a scam. Nevertheless, many people bought into it and the ‘founder’ made off with over $250,000.
Pump & Dump Scam
The idea of a ‘pump and dump’ scam is that the creators of an ICO hype up the value of their tokens through fake news. After the token has been artificially raised high enough, everyone involved in the scam sells off all of their tokens. At this point, those involved in the scam get rich, but all the ‘investors’ that weren’t apart of the scheme are left with a worthless, devaluated cryptocurrency balance.
Pump and dump scams highlight the importance of following mainstream and legitimate sources of information that are accepted by the wider community.
All things considered, avoiding or mitigating risks always comes down to your own due diligence. Always remember to look into the details of your prospective investment, and seek the advice of trusted sources that are immersed in the world of cryptocurrencies.