THE nature of crowd funding a startup, product or service has changed for good. With the advent of the internet there are now multiple platforms enabling millions of people to crowdfund their ideas into reality.
In the cryptocurrency space crowdfunding has become extremely popular with the use of ICOs (Initial Coin Offerings). These projects usually involve the exchange of Bitcoin or Ethereum for a token the most common type is ERC20 tokens.
Projects will offer significantly lower prices for their tokens during an ICO sale. Therefore, the potential profit available for early investors can be huge however this also invites an equal level of risk.
The following are just a few pointers and test’s that might help you avoid getting burnt. It is very important to stress do not consider this as a definitive guide on how to pick a successful ICO in fact be very suspicious of anyone tell you that they have a fool proof method and as always do your own research.
It is very important to find out who is working on the project in the background. When vetting the projects team look for well-known people in the cryptocurrency space, do they have experience in previous successful projects? Be sure to check that each member is actually part of the team and hasn’t just been copied and pasted there. Moonjelly points this tactic out in the article “How To Create An ICO Scam in 5 Simple Steps”
where they state: “You need to show the faces of the people behind this world changing project. So get some at uifaces.com, come up with some common names (so they are very hard to google) and add the most ridiculous resume you can think of.”
Often the team might be anonymous this can be a red flag, it is easy to stick up and leave with people’s money when there is no face to pin the theft too. However this alone does not confirm a scam, for many ICOs it might be necessary to withhold information about developers.
Can the token be forked?
Ask yourself is the token actually necessary and can the product or service operate without it? Often an ICO will offer a token with very little to no value, the value is actually within the product or service. Therefore, the token is likely to gain short term value if the project meets the goals of their roadmap.
However, once the market realizes that there is no utility for the token the value of a token will plummet long term. There are also easier ways of transferring ownership, currently centralized databases operate faster and cheaper than a blockchain. So if a project is offering a good or service that does not require an immutable, decentralized ledger then there is a strong likelihood that it doesn’t belong on a blockchain.
Very important that a project firstly has a roadmap and secondly that it is actually achievable. If the goals of an ICO are set far too high, then the further they will fall. There are likely to be unexpected road bumps and mishaps, this is the case with any start-up a well-structured roadmap will have some of these factored in.
The white paper
Very important that the white paper details not only what the project plans on doing/providing but also actually explains it in detail. If you read through a white paper and find no technical explanation for how the project will actually operate then place down a very large red flag.
Carefully go through a white paper and check for any discrepancies or false claims, here is where you will find any details related to the token sale.
Code is law
Finally, one of the factors that will contribute the most to a projects long term success is the code. Github and Sourceforge can be a nail in the coffin for copycat projects and outright scams.
If you notice that the code is copied with a few minor alterations from other projects, it is not worth your time or money.
A few honourable mentions in the red flag category: copied or faked photographs, celebrity endorsements and buzzword salads with no substance.
As always please do your own research and only invest what you are willing to lose.
Disclaimer: This is not financial advice, we do not accept any liability for any loss or damage which is incurred from you acting or not acting as a result of reading any of our publications. You acknowledge that you use the information we provide at your own risk.