Initial Coin Offerings (ICOs) have become an increasingly popular way for companies to raise funds by offering investors a new cryptocurrency. ICOs are typically unregulated and are often used by scammers to defraud unsuspecting investors. In this article, we will discuss the various types of ICO scams and how to DYOR to identify them.
1. What is an ICO?
An ICO is a fundraising method in which a company creates a new cryptocurrency and offers it for sale to investors in exchange for established cryptocurrencies such as Bitcoin or Ethereum. ICOs are similar to Initial Public Offerings (IPOs), but with cryptocurrencies instead of shares.
2. Types of ICO scams
2.1 Exit Scam
Exit scam is a type of fraud where the creators of the ICO disappear after raising funds from investors, leaving investors with worthless tokens. The creators of the ICO may take the funds and never deliver the product or service promised. In some cases, they may even delete their website and social media accounts to avoid detection.
2.2 Pump and Dump Scam
In a pump and dump scam, scammers buy large quantities of a new cryptocurrency and then promote it heavily on social media and other channels to inflate its price. Once the price has risen, they sell their tokens, leaving other investors with worthless tokens.
2.3 Phishing Scam
In a phishing scam, scammers create fake ICO websites that look similar to legitimate ones. They use these sites to collect investor information, including email addresses and cryptocurrency wallet addresses, which they use to steal funds from investors.
2.4 Fake Team Scam
In a fake team scam, scammers create fake profiles of team members with impressive credentials to make the ICO appear more legitimate. However, when investors try to contact these team members, they find that they do not exist.
3. How to identify an ICO scam
3.1 Lack of transparency
If the ICO lacks transparency or fails to provide clear information about its team, product, or business model, it may be a scam.
3.2 Unrealistic promises
If an ICO promises unrealistic returns or claims to have no risks, it is likely a scam. Don't fall in Ludacris claims.
3.3 No clear roadmap
If an ICO does not have a clear roadmap or timeline for the development of its product or service, it may be a scam.
3.4 No code available
If an ICO does not provide access to its code or whitepaper, it may be a scam.
3.5 No clear use case
If an ICO does not have a clear use case for its token, it may be a scam. Usually these kind of project claim revolutionary change but in ground level they are zero.
Initial coins offerings are always a luring aspect for retail investors. The way a project market their ICO is somewhere people got hooked. There's no doubt 100s of good project our there with legit ICO and proper roadmap. But the number is tiny.
The anonymous nature of crypto sometimes boost these types of scam. So next time before investing a lucrative ICO make sure the project tick boxes all those area. If not it's a area of concern and you should do more research before putting penny on that.
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4. Citations:
"What is an Initial Coin Offering (ICO)?" Investopedia, 2022, https://www.investopedia.com/terms/i/initial-coin-offering-ico.asp
"ICO Scams: How to Identify and Avoid Them," Forbes, 2021, https://www.forbes.com/advisor/investing/ico-scams/ "10 Warning Signs of ICO Scams," CryptoSlate, 2019, https://cryptoslate.com/10-warning-signs-of-ico-scams/