The word “scam” and ICO go hand and hand. The problem is that the word “scam” has lost some of its meaning. There is a spectrum of how to take advantage of people: the simple scams, long-term scams and hybrids. Scammers are smart and they only can scam if they are in an area that is generating value. If there is no value being created then there is nothing to scam. Although scams do put ICOs and crypto in a negative light, scams being around is not totally negative and a symptom of any industry that is innovative and has exponential growth.

___STEADY_PAYWALL___All scams are not created equal

There is a spectrum ranging from simple fraud to a long played out scam over years. One of the latest examples that can be put in the simple fraud category is the Prodeum ICO that reportedly received millions of dollars in ETH only to put the word “penis” on the website and never to be heard from again.^[1] All of the nice marketing material, whitepaper, and pictures of advisors were there just to collect as much as possible in the shortest amount of time in order to take the money and run.

The long play

Some ICOs are trying to deliver a product or at least trying to appear to be trying to deliver a product. The scam lies within asymmetrical information flow on when roadmap benchmarks will be released or partnerships announced. It is not easy to prove when who knew what. Of course, information flow can be asymmetrical without a project being a scam. However, there are definitely projects that have asymmetrical information flow as the main way to make money. Another scam that requires the long play involves hiring service providers. It might sound perfectly normal and in a lot of cases it is. However, if the service provider is part of the ICO team itself or getting kickbacks in some form, then the incentive for the ICO to deliver a product in a timely manner is skewed because of the service invoices regularly becoming due. Benchmarks can be moved back, new pivots announced and clever excuses combined with bag holder blindness can really help long play scams.

How to detect ICO scams?

There is no sure-fire way to detect a scam. You should always trust your gut feeling and ask yourself why you are investing, uh I mean, why you are participating in an ICO crowdsale. Some people take part in ICOs with very short time horizons, others are thinking in terms of years. Some bankrolls are tiny while others are huge. It really is going to depend on how much risk and time you are willing to put into an ICO. Before you read the website, whitepaper, and join the social channels to get a general feeling about the ICO, be clear with yourself what you are expecting out of your participation. If you are not clear with yourself from the start, then all of the research you do on the project could be in jest since you are looking at things from the wrong perspective.

Telegram, Slack and Discord

Join the Telegram chat of the ICO. Observe what is going on, you can scroll up and read back what happened when you were gone. Are people asking critical questions and getting decent answers or are the questions being dismissed and labelled as “FUD”^[2]. If the main answer to the critical question is “read the whitepaper” or “you are just a troll spreading FUD” then right away you know the people from the ICO are not comfortable dealing with critic and hard questions. This should be an automatic red flag. Sure, people can have bad days, but if you see this over and over and get a similar response, take it seriously. The same thing goes for channels like Slack or Discord. What is the general mood of the channel? Is it mainly full of spam or is there some good discussion going on. A lot of people think that the amount of people in the channel makes a big difference, but this can easily be pumped up to ridiculous numbers. If the channel has 70k members with not much valuable discussion, then it doesn’t take much brain work to figure out something doesn’t make sense.

Move up the chain of command

Are C-Levels^[3] in the Telegram channel answering questions? On the one hand, their presence is good, that means they take things seriously. On the other hand, you don’t want to see them in there 24/7. They should be doing something else besides chatting on Telegram. Try to get a private chat or private Skype call with a C-Level from the ICO. You can do so by saying that you are interested in presale conditions (of course, if the presale is still going on and you didn’t miss it). It is a good sign if you get to talk to someone high up in the team. If you are unable to get in touch with someone from the C-Level, then something is up.

The Team

Check out the team’s and advisors’ social media. Are they new accounts that have been around for a while? Can you find their pictures in Google products search or are they original photos? If the team is an army or small town of 50-100 members, then ask yourself why. In a very few cases this might make sense, but in general, this is just a way of using these 50-100 people to promote the ICO to their network; they are not part of the team based on merits.

Bounty Hunters

The bounty hunters are often overlooked. If the ICO is a scam, then the bounty hunters are scammed, too. They ask questions and should get clear answers. If the bounty hunters get scammed before the ICO is over, then that is of course a bad sign. An ICO should have someone who deals with the bounty hunters in a professional way. Don´t be afraid to message anyone that you see complaining or asking tough questions that are not getting answered. Try to get a first-hand account of what happened.

Due Diligence

The points above are just the basics. If the ICO looks good after going over these points, you still should do some further research, especially on the team. You should ask someone who knows how to code to look at the project’s GitHub code. A lawyer should be able to tell you if the ICO is being done in a legal way and if their business model is compliant with existing laws.

ICOs Risk vs. Reward

Everyone has a different risk tolerance. The risk of losing all of the capital you put into an ICO is real. Sure, you could also have “sick gainz” and be driving a lambo^[4] to the Starbucks drive through to pick up your next Frappuccino. Chances are higher though to get totally “rekt”^[5] and be complaining about the latest ICO scam on Reddit and Twitter.

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* Theo Goodman has been working as consultant, advisor and in various roles in crypto and IT businesses. He currently acts as digital creative studio Proof Of Work’s meme consultant.

^[1]  Peterson, Becky, „Prodeum crypto scammers allegedly stole its teams’ identities before vanishing and leaving only a website with the word ‘penis’”, 29 January 2018, https://www.businessinsider.de/cryptocurrencty-and-blockchain-startup-prodeum-pulled-an-exit-scam-2018-1?r=US&IR=T (last time visited 23 May 2018).

^[2]  Fear, Uncertainty and Doubt. A characterization of people spreading fear, uncertainty and doubt.

^[3]  Chief positions, e.g. CEO, CFO etc.

^[4]  Slang for „Lamborghini“.

^[5]  Slang for „full capital loss“.