With dozens of new coins and tokens launching every month, a series of initial coin offerings (ICOs) follows. Investors’ appetite for these opportunities has grown despite the challenges cryptocurrencies faced in 2018. Many believe ICOs can replace traditional venture capital-driven funding. However, these developments come with challenges and ICO investment scam risks. In this article, you’ll learn about common ICO red flags and scams you should watch out for to protect your investments.

What are ICOs?

Initial Coin Offerings are new methods of fundraising used by businesses and startups. This form of cryptocurrency is employed by organizations seeking to raise money to launch a new app, coin, or service. While ICOs are risky, many others have provided huge returns to investors. By staying vigilant and informed, investors can mitigate the risks associated with ICO scams and secure their assets, including those denominated in ETH to USD values.

Types of Scams in Initial Coin Offerings

Here are common types of scams and red flags to be aware of before making any investments:

1. Bounty Schemes

Bounty schemes offer incentives to numerous participants for various activities associated with an initial coin offering (ICO). In recent years, bounty programs have become a part of the cryptocurrency ecosystem and integrated into many ICOs. However, these schemes also pose ICO investment scam risks. Bounty scams represent a type of ICO scam.

2. The Ponzi Scheme

A Ponzi scheme refers to a type of fraud investment that pays existing investors with funds collected from new investors. Ponzi scheme organizers promise investors high returns with little or no risk by investing funds in high-growth opportunities. To attract more investors, the organizers promise a high return later on.

Rather than engaging in legal investment activity, these deceptive actors take advantage of earlier investors by making promised payments and using some of the invested capital for their own benefit.

3. URL Fraud

Scammers commonly use counterfeit websites that look like ICOs to trick users into depositing coins into compromised wallets. Naive investors who cannot spot a fake website often fall victim and lose their ICOs.

4. The Exit Scam

Unscrupulous promoters plan a cryptocurrency exit scam by collecting funds for an ICO and then disappearing without providing any information to investors.

How to Identify ICO Scams

To help you make smart investment decisions and avoid fraudulent ICOs, here are few methods available:

• Read the white paper: To get a clear understanding, read the whitepaper project carefully as it will help you avoid ICO scams. Any blockchain white paper project lays out the goals, background, concerns, strategy, SWOT analysis, financial model and implementation timeline. Companies that don’t provide whitepapers should be avoided.
• Understand the team: The best safeguard to avoid scams is to conduct thorough research about the project’s team members before making any investments. Examine their profiles on LinkedIn and other social media platforms. Investigate their credentials and their expertise before deciding whether the unit is true or not.

Endnote

Because of the lack of regulations, developers can employ many tactics to defraud investors, leading to ICO investment scam risks. Therefore, before investing in any ICO, you’re required to do due diligence and exercise caution. By identifying scams, you’re more likely to invest in an ICO that is worth your investments and time.