ICO industry is especially prone to scam as significant funds are concentrated in a field that does not have standardized regulation. It might be reasonably easy for unhonest founders to embezzle collected capital.
How common are scam ICOs?
A study by Satis Group LLC based on data from public sources suggests that as much as 80% of ICOs are tagged as scam projects. Merely 8% of ICOs successfully list tokens on the exchange, therefore, fulfilling their obligations before the investors. It is apparent that the ratio of scam projects to genuine ones is possibly the highest in the ICO market compared to any other investment field.
How to identify scam ICOs
Generally speaking common sense and conducting personal due diligence should guarantee safety for a careful investor. However, some red flags might suggest staying away from investing in a particular project.
If an ICO does not have a smart contract, it means the team can walk away with the money even if a soft cap is not reached.
Certain ICO projects have anonymous teams. It is a good idea to withhold from investing in such projects. After all, reasons that can lead the team to decide to hide their identities are probably of a dodgy nature. Similarly, if team members don’t have social media profiles, it can be suspicious.
If the project’s fundraising has been going for a while, but no funds have been collected it is a good idea not to invest in such a project, as the likelihood of it conducting a successful ICO is extremely poor. Even though the project does not necessarily have to be a scam, it is best to walk past it and look for a better investment option.
If an ICO uses exclusively one-way communication with the community, it might suggest that something fishy is going on with the project. Normally active communities are incredibly beneficial for ICOs. Therefore there is little reason to limit their potential by using one-sided communication if not to hide negative feedback.
Extremely high fundraising goals are another red flag, as most honest teams will try to raise the exact amount of money needed for successful development. If the team asks for hundreds of millions of dollars, some questions should naturally come to mind.
Scam ICOs will often try to dazzle naive or inexperienced investors by presenting world conquering plans. Honest teams know their weaknesses and strengths, and their roadmaps and whitepapers always stay realistic.