3 Ways to Avoid Fraudulent ICOs

The advent of blockchain technology has brought with it some novel advancements, with one of them being the emergence of initial coin offerings (ICOs). This innovative mechanism for capital-financing has powerful consequences, for one, ICOs are challenging the commonly held view that investing in promising early stage start-ups is a right reserved exclusively for VC funds or high-net-worth individuals. Despite the immense promise that this novel fundraising tool possesses, its immaturity has resulted in fraudulent acts that are a stain on the overarching goals of the cryptocurrency community. Thus, avoiding such deceitful activity is a must.

Check out the 3 best ways to avoid fraudulent ICOs

1. Having the Right Mindset

The first step to avoiding fraudulent ICOs is to enter this subset of the community with the correct mentality. ICOs are portrayed as a mechanism that can result in instantaneous wealth. However, the first question one should ask is not: “how much return on investment an ICO can produce?” but: “What is this project attempting to do and is it viable?”. The problem with focusing solely upon the monetary element is that it can blind one to the obvious warning signs that an ICO is fraudulent. Which is why, even after high-profile ICO scams are documented, individuals still fall prey to future ones. Thus, the first step to avoiding fraudulent ICOs, in reality, begins with the individual.

2. Determine Project Viability

As alluded to in the preceding paragraph, the first course of action that one should embark on when looking to get involved in an ICO is to determine project viability. Is the problem that the project seeks to tackle really one that needs solving? If so, does the whitepaper do a good job of explaining, in detail, the technical solutions to the problem? A tell-tale sign that an ICO is likely a fraudulent one is a whitepaper that is comprised mainly of buzzwords. In lieu of technical discussion is a whitepaper that lacks clarity and sets unrealistic goals that are devoid of the sharp reality that comes with successfully bringing an idea to market. Moreover, do not outsource the responsibility of determining the feasibility of an ICO project. A five-star rating of an ICO should not sway your investment decision, that should be left only to the research that you yourself have conducted.

3. Find Projects with Working Prototypes

The best way to ensure that one is not subject to a fraudulent ICO is to only invest in projects with a working prototype. The prevailing conception in the ICO market seems to be that, investors should deploy their capital to a prospective ICO project, then the team will endeavor to build what is stated in their whitepaper. This is wrong. Before even conducting an ICO, there should be evidence that a stated idea can work. In the field of venture capitalism, before any early stage start-up receives funding, investors ensure that, to some extent, an idea can actually work. It serves as an indicator as to the project’s potential future success. For example, AirBnB did not receive funding based on their belief that home rental could work. Instead, the founders had to first prove that people were willing to rent out their houses on some scale.

Future Development of ICOs

To conclude, ICOs have had a significant impact on the way that capital-financing is viewed, by effectively taking it from the hands of the few and placing it into the hands of the many. They have also changed network incentive structures that are embodied by cryptocurrencies such as Bitcoin. In the Bitcoin network, for example, there is a clear incentive to dedicate computing resources in exchange for bitcoins in the form of a block reward. You also have Bitcoin halving events that encourage the value appreciation of Bitcoin by means of scarcity. This is in contrast to some ICO projects, where the only role that the underlying tokens really serve is as a speculative asset, despite the fact that projects will argue that they are ‘utility tokens’. Selling these tokens in order to raise capital arguably ends up being detrimental. Because the individuals with the tokens are not really interested in making use of them in the first place, as they are more interested in turning a profit. However, what is important to remember is that ICOs are an extremely new way to raise capital, there is no doubt that we will continue to see significant changes in their structure moving forward.

Featured Image: depositphotos/ peshkova

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