How to Spot an ICO Scam: Key Signs and Evaluation Tips

By Ava McKinneyOnline Safety

How to Spot an ICO Scam

Scam, in the context of ICOs, refers to fraudulent schemes designed to exploit the trust, naivety, or carelessness of users. Scams exist in all industries, from energy to banking, and the ICO space—despite being relatively new (since 2013)—is no exception. Let’s break down how to identify and classify ICO scams, and what you can do to protect yourself.

Types of ICO Scams

  • By Duration:
    • Short-term scams: The most common, where the goal is to collect funds quickly and disappear.
    • Long-term scams (HYIPs): These operate over a longer period, like the infamous OneCoin.
  • By Complexity:
    • Simple scams: Similar to spam, they target a wide audience hoping for a small percentage to fall for it.
    • Moderately complex: These use bots with fake histories and more convincing documentation, but a deep dive into the team or product reveals red flags.
    • Complex scams: Very hard to detect, sometimes involving well-known crypto banks or projects with seemingly legitimate operations.
  • By Intent:
    • Pre-planned scams: The creators never intended to deliver a product, only to collect funds.
    • Unintentional scams: Sometimes, projects turn into scams due to internal conflicts, loss of motivation, or greed (e.g., MtGox, potentially EOS).

Key Criteria for Evaluating ICO Projects

To assess any ICO, focus on four main components:

  1. Team: Who is behind the project?
  2. Tech: What technology is being used?
  3. Theme: What is the project’s concept?
  4. Token: What is the legal status and economic model of the token?

1. Team

  • Verify the authenticity of team members. Look for real social media profiles (Facebook, LinkedIn) and check for genuine connections and activity.
  • Check advisors’ involvement. Reach out to them to confirm their participation.
  • Investigate the legal entity: registration, location, and associations. Even sending a physical letter to the listed address can be revealing.
  • Search for phone numbers or emails linked to the team. Old accounts and indexed data can provide valuable insights.

2. Technology

  • If you’re not a tech expert, ask for help in specialized forums or Telegram groups. Compare the project’s code with existing projects to spot copy-paste jobs.
  • Contact the developers directly with questions. Scammers often avoid direct answers or respond vaguely.
  • Useful Telegram groups for research:

3. Concept

  • Analyze the White Paper and Roadmap. Check for consistency in timelines and feasibility of goals.
  • Evaluate the market need and economic utility of the service. Overly optimistic or confusing descriptions are red flags.
  • Check how long the concept has existed before the ICO and how quickly it moved from idea to fundraising.
  • Ask: How does the blockchain solution outperform traditional IT solutions? If there’s no clear answer, be cautious.

4. Token

  • Understand the token’s purpose. If it’s just “buy low, sell high” with no real utility, that’s a warning sign.
  • Look for a clear token distribution agreement and consistent documentation across the White Paper, Roadmap, and public offers.
  • Check the token’s economic model: How many tokens are issued? What supports their value and liquidity?
  • Consider whether the project accounts for token economics and growth indicators. Many don’t, even among reputable projects.

Practical Analysis Tools

  • Use resources like ICOtracker, ICOrating, and icostats to research projects and their histories.
  • Check domain registration dates. A brand-new domain for a supposedly established project is suspicious.
  • Use web-arhive.ru to view historical versions of project websites.
  • Look for backlinks and references to the project on partner and news sites.
  • Set up Google Alerts for the project’s brand and key team members to catch news and updates.

Case Studies

  • Matchpool: Raised $5.8 million via ICO, but the CTO left days later amid allegations of misappropriating funds. Such risks are hard to predict but can be mitigated by projects with:
    • Multi-signature wallets
    • Stabilization funds for emergencies
    • Smart contracts for refunds if funding goals aren’t met

Common Scam Examples

Key Takeaways and Rules for ICO Investing

  1. Only invest in projects whose service you understand and whose goals align with your own.
  2. Speculation should not be your only motivation. Projects like MMM (Mavro) are classic examples of what to avoid.
  3. Only invest money you can afford to lose, regardless of the amount.

These are the basics. As you gain experience, develop your own evaluation system, whether it’s a simple positive/negative scale, a 10-point or 100-point system, or a mixed approach assigning negative and positive points to various factors. If your final score for a project is below 33-66%, it’s likely a scam; 66-75% is average, and above that are good projects.

Remember, the biggest risk factor is often human greed. If you’re prone to impulsive decisions, ICOs may not be for you.

For more on legalizing funds obtained from ICOs, see this article.

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