What is ICO Scam

2022-08-01 19:48:48

When using crypto products such as wallets and exchanges, protecting the security of your assets is the No.1 priority. In “CoinEx Wallet Security Tips”, we will share some basic crypto know-how such as common scams, how to use crypto products safely, and blockchain security mechanisms from multiple perspectives to help you fully understand asset security and adopt enhanced protection measures.

 

Speaking of crypto scams, ICO is an unavoidable term. In particular, back in 2017, the market saw a large swath of ICO projects, and there are even platforms that focus on ICO.

 

It is undeniable that ICO, a way of funding blockchain projects, has fostered some great blockchain projects. Many DeFi projects in the previous bull market were initially funded through ICO, which ensured that project teams had sufficient funds for growth and development.

 

However, most ICO projects have ended up in failure, and there have even been ICO scams where the project team fled with investors’ funds, leading to huge losses.

 

I.What is ICO?

ICO (Initial Coin Offering), a term used in the blockchain industry, is a common way to raise funds for cryptocurrency/blockchain projects. Derived from the concept of IPO (Initial Public Offering) in stock markets, ICO is a channel by which people invest in start-up projects with cryptocurrencies.

 

Simply put, in an ICO, the project team issues a token using blockchain technology to raise funds, and investors can subscribe to such tokens with more liquid cryptos such as Bitcoin and Ethereum. Generally speaking, early investors subscribe to tokens at lower prices. As such, they are likely to earn high returns when the tokens issued by the project team become available in the market.

 

According to public documents, the first ICO project clearly documented happened in June 2013 when MasterCard (MSC) carried out crowdfunding on the Bitcointalk forum. Following MasterCard, Future Coin (NXT) became the second crypto project to raise funds via ICO. The project raised 21 bitcoins (about $6,000 at the time). It is noteworthy that the market cap of NXT peaked at over $100 million, and many investors regarded the NXT fundraising campaign as the most successful ICO.

 

II. Why are there ICO scams?

As a way to fund blockchain projects, ICO has indeed provided financial support for the growth of premium projects such as Ethereum. However, its low fundraising cost has made ICO a tool used for running scams. This is especially true back in 2017 and 2018 when the market witnessed plenty of ICO scams.

 

That said, why are there ICO scams?

 

1. Unclear regulatory policies in the early stage

As blockchain is a decentralized technology that remains in its infancy, the market lacks maturity, and ICOs are not bound by sound laws and regulations in many countries. To scammers, these are readily exploitable loopholes.

 

After the market was impressed by the get-rich-quick legend told by Ethereum, the ICO model boomed. Some project teams conducted anonymous fundraising, and others published whitepapers drafted by ghostwriters. There have even been scammers who never publish any whitepaper but use slideshows to raise funds. Many investors have fallen victim to such scam projects and suffered heavy losses.

 

2. Low threshold of token issuance

Along with the constant technical advancement made by public chains like Ethereum, the threshold of token issuance has gone down over time. There are even foolproof tools that allow anyone to issue tokens within minutes by simply entering parameters like the token name and total supply. Meanwhile, the GAS fee required for token issuance has also been significantly lowered.

 

The lower technical threshold and the reduced fees of token issuance have made it much cheaper for scammers to run their tricks through ICO. Furthermore, as the DeFi market kept expanding, people can now list tokens on a DEX for free, without any review process, which further lowered the cost of running ICO scams.

 

3. Greed

In the crypto market, BTC and ETH have taken a thousandfold leap, which brought huge returns to early investors, and some of them have become muti-millionaires. Despite that, mainstream cryptos like BTC and ETH have already become extremely valuable, and their prices may not grow much in the future. Today, investors are all looking for the next BTC/ETH to earn incredible returns.

 

Capturing such market greed, scammers issue tokens and encourage people to invest in them. When presented with tokens that promise a hundredfold increase in value, many beginners would rush into the market and suffer heavy losses.

 

III. How to guard against ICO scams?

The boom of DeFi and NFT has catalyzed changes in token issuance. In today’s market, most projects offer tokens via IDO and mining. That said, there are still scammers who try to trick users with ICO, and we should be careful with ICOs and projects that match the following characteristics.

 

1.Anonymous developers

If a project is built by anonymous developers or a team unknown to the crypto community, it could be run by scammers. After all, tarnished credibility is not a risk to an anonymous team. Moreover, anonymity also helps scammers flee and reduces the cost of running the scam. Therefore, we must stay on alert if a project is backed by an anonymous team.

 

2.Lack of transparency

If a project team hasn’t released a clear roadmap or code snippets, if its code base has not been updated for a long time, or if it does not present any product demo, test version, or other forms of progress report, it probably has nothing to show. When presented with such projects, we have to take extra caution.

 

3. Unrealistic or unclear goals

The lack of whitepapers, clear, realistic goals, or even official websites is evidence that the project team probably does not have any clue as to what it’s doing. It might not even care about the goals since the team may not intend to conduct any long-term operations.

 

Moreover, abnormal, poorly designed, or plagiarized websites, suspicious or unoriginal whitepapers, and the lack of transparency in terms of asset flows are all clear giveaways that demand extra caution.

 

In a nutshell, although ICO scams are becoming less frequent as the crypto industry matures, we still have to stay on alert and avoid falling into a trap.

 

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