ICO Investment Scams: How to Spot One (Apart from Due Diligence)

The hype around cryptocurrencies, and the fact that relatively few people clearly understand their underlying mechanism, makes them a fertile breeding ground for questionable business practices.

Gunnar Jaerv Published by Gunnar Jaerv on 27 September 2018 (Updated NaN )

The hype around cryptocurrencies, and the fact that relatively few people clearly understand their underlying mechanism, makes them a fertile breeding ground for questionable business practices. ICOs are in a similar position: presented to some investors as a get-rich-quick scheme with a black box at its center, they have been involved in poorly-designed launches, vaporware and open, blatant scamming and fraud.

Neither cryptocurrencies nor ICOs are inherently scammy or dishonest, and even venerable fiat institutions aren’t invulnerable to being used for scams; just look at Deustche bank, recently raided in a money-laundering case related to the notorious Panama Papers.

However, it is important to be able to recognize a fraudulent or untrustworthy coin or ICO.

One of the most popular ways to enact fraud using blockchain is to simply create a fraudulent ICO: an initial offering for something that doesn’t exist and never will. Rather than raising funds to build a real business based on the ideas put forward in their white papers and websites, criminals mock up marketing materials, encourage investment, issue tokens, then take the money and run.

How do you spot a fraudulent ICO?

A quick glance might make it seem like a company checks out. But that’s because scammers are wise to the quick glance. They’ll use models to create phony LinkedIn accounts, run somebody else’s white paper through spinning software, and build out a marketing campaign that looks like the real thing.

So it’s important to look behind the scenes. Only due diligence can ascertain whether a project comes up to scratch or not, but whether you’re dipping a toe in the waters or going all in, you can do a quick once-over for yourself and spot some of the worst offenders. Here are a few vital warning signs.

Their white paper is vague or incomprehensible

Download and read their white paper; if you read the executive summary and have absolutely no idea what they do, that should be a red flag. Even complex ideas can be simplified to the point where their intended effects are comprehensible.

For instance, here’s the executive summary of the Bitcoin white paper:

Abstract. A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of CPU power. As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they'll generate the longest chain and outpace attackers. The network itself requires minimal structure. Messages are broadcast on a best effort basis, and nodes can leave and rejoin the network at will, accepting the longest proof-of-work chain as proof of what happened while they were gone.

Even though it introduced an entirely new concept, it still makes sense to a nontechnical reader. ‘A purely peer-to-peer version of electronic cash’ might need a little more explaining, but you’re clear on what they do — what the value proposition is.

Here’s the executive summary of OneCoin, currently under investigation in India, Bulgaria and elsewhere for running what Tushar Doshi, Deputy Commissioner of Police in Mumbai, told the Indian Express in 2017 was "clearly a Ponzi scheme":

The ONE cryptocurrency offered to participants through the OFC bundles during the present Offering, has been designed to meet demand as its adoption grows. Scalability has proven to be a serious issue for retailers and one of their main reasons for discarding cryptocurrencies. That makes ONE a viable alternative to most cryptocurrencies currently offered on the market.

The fact that cryptocurrencies are not yet mainstream can be linked to factors such as scalability issues, lack of understanding of the concept of cryptocurrencies by mass users, volatility and safety issues, and the risks related to them. The fact that cryptocurrencies operate in a highly unregulated industry and have a reputation of being “risky”, “pyramids” or “bubbles” presents a serious barrier for their mass scale adoption by most users and retailers.

The present Offering aims to give access to the blockchain-based cryptocurrency OneCoin to a wider audience. Used by over 3 million people globally, the coin (ONE) has clear advantages for mass users and retailers that would prefer an alternative to emerging coins, which has improved accessibility, security and efficiency. The KYC/KYB and AML compliance procedures as well as the ability of the system to make instant, low cost and secure transfers make the coin reliable, safe and AML compliant.

Not only is this the seventh page of a 35-page white paper, buried behind a two-page legal disclaimer, market analysis and more. But after three paragraphs, you still don’t know what they do. Fluff, vague language, and allusions to markets and advantages take the place of facts.

Not every ICO or coin will have a white paper as admirably concise and clear as Bitcoin’s. But if it reads like marketing fluff, that’s a warning sign.

They don’t need blockchain

Bitcoin would be impossible without the blockchain. But some ICOs have jumped on the bandwagon, adding blockchain as a marketing buzzword to projects that either don’t really use it, or don’t really need to. There’s no reason a non-blockchain company shouldn’t raise finances on the blockchain, but if they’re not upfront about it, that’s a concern. So is an invented use case where blockchain is squeezed in as an afterthought.

There’s nothing on their GitHub

If the project boasts about being open-source, it might be because being open-source attracts more community input and makes it more likely that mistakes will be found and corrected. Or it may be that they think it sounds techy and cool.

Or they may be making it up. If you take a look at their GitHub and there’s no code there, the question becomes: do they even have any?

It basically belongs to them

It’s common for ICOs to earmark a certain proportion of tokens for the dev team or the company that owns the project. No problem — unless the proportion is such that it disproportionately and/or irremediably favors the development team. If it basically belongs to them, and they can do what they like with it, that’s a red flag. For instance, look at Homero Garza, whose Paycoin project was a front for a $9 million wire fraud based on his ownership, behind the scenes, of the majority of mining rights.

That’s one reason why the use of a more centralized blockchain architecture raises eyebrows in the community, and part of the reason for the popularity of the Ethereum blockchain: it’s sufficiently decentralized to be unaffected by the recent SEC ruling that some ICOs were in fact illegally selling securities. Additionally its robust decentralization ensures that frauds like Garza’s can’t be perpetrated on the Ethereum chain.

Their roadmap leads nowhere

Whether you approach an ICO as an investment in the company’s project or the acquisition of tokens to trade with, the company has to have a plan to turn their project into a real business that delivers value and makes a profit.

Even if your intention is to trade in the tokens themselves, selling them on at a higher price, they’re unlikely to gain in value if they’re the product of a project that never outgrew its ICO.

Scam ICOs don’t need to worry about this: your investment is their profit, pure and simple, so they can afford not to know how they plan to wean their project off capital and make money with it. If there’s no roadmap, even a basic, simplified one, that shows an intention to create and operate a real, profit-making business, beware.

They’ve attracted celebrity support

People who are great at one thing, aren’t necessarily great at something else. Remember Shaq’s film career? An ICO that has celebrity backing isn’t usually a sign that it’s reliable.

Of course, it might not really have that backing at all: Consider HoweyCoin, which bore all the marks of an "exit scam" ICO: A rushed, fluff-filled white paper; a team that appears to only exist on the website, and don’t appear in Google or social searches; and unverified celebrity endorsements.

In fact, of course, HoweyCoin was set up by the SEC to warn potential token buyers and investors of what to look out for and avoid. They did a solid job — if you’d like to see what a bad, potentially dangerous ICO looks like, take a look at their website.

Meanwhile in the US, Floyd Mayweather and DJ Khaled both promoted Centra’s ICO through social channels, without disclosing that they’d been paid to do so. That’s on them rather than on Centra, but the use of paid celebrity influencers isn’t a good look for a serious investment opportunity. What is on Centra is a criminal fraud investigation; if it doesn’t fall their way, the $300,000 disgorgement Mayweather has to pay will seem small potatoes indeed.


I’d recommend only getting involved in ICOs when you’re clear on what they do and how they plan to make money. If you see an opportunity but you’re not sure of the details, that’s the time to get some advice from an investment of finance pro with experience in the space.

But these are some of the most obvious warning signs that an ICO is, deliberately or otherwise, not really set up to go the distance.


Disclaimer: This publication is general in nature and is not intended to constitute any professional advice or an offer or solicitation to buy or sell any financial or investment products. You should seek separate professional advice before taking any action in relation to the matters dealt with in this publication. Please note our full disclaimer here.

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