With so many scams, charlatans, and con artists in cryptocurrency, it often feels daunting for newcomers to the space to differentiate between the legitimate and scam projects. So today I am going to go over some of the warning signs to look out for so you can avoid getting taken advantage of by a thief.
Since cryptocurrency is a bearer asset, that is similar to cash in liquidity, it attracts shady individuals from all walks of life that all want to get their grubby hands on your coins. Also, a lot of early Bitcoin adopters were hackers, dark web drug dealers, identity thieves, credit card fraudsters, etc.
Basically, all the unsavory types on the internet, have been involved with cryptocurrency since its beginnings, and now with the dizzying amounts of money involved, that has only increased exponentially, bringing scammers from other industries into crypto.
All of these scammers are looking to separate a noob from his finances. So what kind of things should you be looking out for?
Warning signs that you may be getting scammed
1. The Team
When looking into an ICO, the team should be transparent about who they are, they should provide their Linkedin profiles, Twitter, etc.
- If they are anonymous, how do you know they won’t disappear with your money?
- I know crypto is a strange world where Satoshi was anonymous, but Satoshi wasn’t shilling an ICO, he allowed people to mine and coins were fairly distributed to mining participants.
- Don’t give money to anonymous people online. If it’s a project with an anonymous developer or team, be extremely wary unless they are doing a proof of work mining distribution of coins.
- Usually, Anonymous + Pre-mine = Scam.
- If the team does share information about themselves, you really need to look into it and verify that its true, I have personally seen cases where the ICO faked team members completely, lied about someone being part of a project and included them in all the promo materials (unbeknownst to them), I have even seen an ICO use a picture of Ryan Gosling the actor, as the image for a “team member”.
- So don’t just take the info at face value, do your due diligence. It’s worth it to do reverse image searches on Tineye and Google Images.
2. Are they solving any problem?
This is is another very important thing to consider. With all the “pie in the sky” dreams being sold to the tech illiterate about how blockchain will save migrant workers in the 3rd world and decentralize the artificial intelligence industry with machine learning 3d printers, it’s easy to get caught up in the marketing buzzwords and hype.
- There are so many ICOs that try to dazzle you with horse manure, and make overly complicated statements using a ton of tech jargon and hot buzzwords, with absolutely no substance behind the concept.
- A good rule of thumb is “if you can’t understand their whitepaper, then they probably can’t either.”
- Another thing to look out for is “are they finding a problem to solve?” A lot of these scam ICOs are claiming to have a use case by inventing a problem to solve.
- They want to get in on the blockchain gold rush so they make some scammy cash grab token that either doesn’t solve a problem that needs to be solved, or they invent a problem and then manufacture an overly complicated solution that their token provides.
- They might even have a multiple token model in which they require you to purchase more than one scam token to use the product/platform/service.
3. Can that problem really be solved?
This is also a favorite tactic of ICO fraudsters. They claim their token solves a problem, but the problem is either technologically unfeasible, or it is a problem with no way to solve it. A good example is the amount of data that decentralized applications (DAPPS) are bloating the Ethereum blockchain with. DAPPS are just in their infancy but even the smallest amount of usage creates massive amounts of data that slows the Ethereum chain to a halt and drives fees through the roof. The technology for them to scale simply isn’t there yet. This does not stop them from marketing themselves and the “utility token” associated. This is just one such example of many.
- Are they making an announcement, to announce that they will make an announcement? The fact of the matter is that crypto and ICOs especially is full of snake oil salesman and they will sell you a dream of the future, payable today in Bitcoin.
- Scammers love nothing more than to trick you with buzzwords, overly technical blabber, and feel good cause that the token supposedly advances.
4. Do they really need Millions of USD to do that?
This one seems self-explanatory, but you’d be surprised at what investors have thrown ungodly sums of money at.
- When considering if you want to invest in one of these projects you need to really evaluate how much money they are trying to raise and what they are trying to accomplish.
- Do they really need $100 million USD to put pet names on the blockchain?
- ICOs are such a radical departure from the traditional fundraising process for startup businesses, and they received such an overwhelming response, that it seems like epic amounts of money are being shoveled at really dumb ideas or ideas that could be flawlessly carried out with a lot less money.
5. Are they a registered business?
It is very important to check out the actual business behind the project, just like you would for the team members.
- You need to check out where it is based out of, where its registered, as jurisdictions are important.
- Not every jurisdiction has the same financial legislation or consumer protection laws, so what is illegal in the west may be standard practice elsewhere, and may allow the scammers a loophole to scam you and get away with it.
- This should be another important diligence you carry out.
6. Using an escrow service
A way to make your investment securely is to utilize an escrow service to make sure you receive your tokens. An escrow is a 3rd party intermediary that doesn’t release your funds until you have verified that the seller has met their obligation to you, by providing the good or service you were purchasing.
- A few escrow services have arisen to combats scams in the ICO world.
- If you plan on making an investment in a project, this might be your best bet to assure you don’t get ripped off at the point of purchase.
- Also, remember that most of the ICOs pay money to be featured on News websites and being featured on a major news website does not make them trustworthy.
7. Is the Whitepaper understandable & professional?
One of the key points of analysis of an ICO is the whitepaper. The whitepaper is the authoritative, and well-researched document that shows the problem they intend to solve, and the solution they put forth to do so. If the whitepaper is poorly written or has a lot of grammatical errors and typos, it should make you think twice.
- The whitepaper is supposed to be a professional study of a problem and a technical breakdown of their approach to providing a solution, it should be well thought out, easy to understand, and make logical sense in how they solve the problem.
- If it is too complicated or doesn’t make sense, or uses overtly technical vocabulary or jargon to confuse the reader as to what they are actually doing, it should be a red flag.
- The Bitcoin whitepaper by Satoshi Nakamoto is a perfect example of what a white paper should be, it’s concise, to the point, easy to understand, and doesn’t have a lot of fancy graphics and marketing fluff.
- If the whitepaper is dazzling to the eye with wild colors, testimonials, graphics, and charts but slim on essential information, that should be a warning as well.
- The whitepaper should not gloss over pertinent information to the success of the project. It should provide details on exactly how they plan to achieve what they plan to carry out.
8. Checking out the code
Another way to investigate the ICO you are considering investing in is to check the Github for the project and check out the progress being made in the code.
- Github is a platform for developers to communally work on writing software code together.
- Most free open source software (FOSS) projects utilize it so team members can all contribute from anywhere and all keep track of each other’s work and contributions.
- A savvy ICO investor can join the mailing list and see what contributions and pull requests and merges are being added on a weekly/monthly basis.
- Even if you’re not a coder, you can still tell if a project has a motivated team that is constantly updating and improving the code, versus a team that has abandoned the project and hasn’t made any new contributions, or an insufficient amount of new code contributions.
- If you are a coder, you can audit code yourself, and if feel like it, even make a contribution.
9. Google “ICO Name + Fake”/”ICO Name + scam”
This seems like another step in the due diligence process that seems like a no-brainer, but again, you’d probably be surprised how often the FOMO gets people.
- Google/duckduckgo search the name of the project plus the word “scam”/”fake”/”fraud”
- Read the threads and forum posts that come up in the search results
- Reddit, Bitcointalk.org, Medium, Steemit, and Tweets are all excellent ways to learn about ripoffs
- Many times the community will post a warning about projects that have a lot of red flags.
10. Lack of communication
This is another large red flag that should warn that the team may not be on the up and up, or be acting honestly.
- If they want millions of dollars, they better be ready to answer tough questions.
- If they block people from their Reddit, telegram or discord for asking legitimate questions, it’s a huge warning.
- If they go on rage tantrums whenever they are asked to give details, it’s a red flag.
- If they act childishly by insulting people who ask for legitimate information it’s another red flag.
- If they respond with overly complicated technical answers in an effort to confuse someone instead of giving a straightforward answer, it’s a red flag.
- If they answer evasively, it’s a red flag.
- If they choose to communicate in a way that leads you to believe they are being deceptive, it’s a red flag.
Let me know in the comments if this guide helped you.