ICOs and related Crypto-currency fraud types and scam avoidance tips

Chris Lee

Initial Coin Offerings, a derivative of the crypto-currency rage, have become, almost overnight it seems, the one single largest source of fraudulent exploits on behalf of those of criminal intent. Since no national borders impede Internet advances, these clever schemes have spread like wild fire across every market on the globe. Regulators cannot wait for consumer complaints to rise to unacceptable levels before acting. Many have chosen to blare away with every kind of warning conceivable, as if investors are paying attention to their entreaties.

ICO scams

What started as an innovative way to raise start-up capital, outside traditional channels, has unfortunately become a siren song of conmen from London to New York to Hong Kong to you name it. This new wave coincidentally coincided with an unbelievable run up in values for nearly every existing crypto-coin in circulation. Whether it was Bitcoin, Ethereum, or any one of the hundreds of other coins in circulation today, values were headed north in a dramatic fashion.

Last September, when the craze was white hot, we wrote: “Everyone loves a great investment that delivers enormous returns, but when is “hot” another word for a scam in progress? Initial Coin Offerings, or “ICOs”, are the latest rage, riding on the coattails of crypto-currency zealots that believe that Bitcoin or Ethereum or any other variety of this genre is the best thing going since sliced bread. The religious zeal that accompanies crypto-currencies and their blockchain technology is nothing short of extraordinary, but intrinsic manipulation of supply/demand dynamics has driven valuations beyond the realm of believability.”

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Investors in existing coin products were already boasting of fortunes made in only a few short months, bragging about acquiring second homes in exotic places, and consuming at obscene levels, all due to the wonderful world of crypto-currencies. The hype worked. Values soared as demand formed a tsunami of sorts. To the uninformed, coin supplies are strictly controlled, such that any hype in demand will send prices through the roof.

As we also wrote in September, “Consider this simple proposition: If you had bought Ethereum at the beginning of this year at $8 a coin, you would be staring at a current valuation of $280. What? A return of 3500% in only nine months? Sounds like a scam to any outsider, but there is more to tell in this story. For the time being, remember that paper gains are not real gains, until you sell your position.” This situation had the well-known markings of an enormous “Pump-and-Dump” scheme written all over it.

For those wise enough to cash in at astronomic valuations, the world was a wonderful place. For others, the crash came swiftly. Here is a brief recap for the two leaders of the crypto-currency arena:

  • Bitcoin: Ended 2016 at $400; rose to a height of $19,343; the only way forward from that asymptotic rise was down – Today’s value is $6,340, a decline of some 67% from its peak;
  • Ethereum: Ended 2016 at $8; rose to a height of $1,343; the only way forward from that asymptotic rise was down – Today’s value is $448, a decline of some 67% from its peak;

These rise and falls were extreme examples of asset bubbles in formation and their inevitable abrupt fall from grace. For coins with less of an audience of ardent supporters, the blood in the streets was a flash flood. At the end of the demand spectrum were the hundreds of ICOs with little, if any, demand to speak of. Investors were in shock. Sadly, many of the ventures were abject frauds to begin with. Capital raises disappeared, along with the sales and marketing folks that had profited at the expense of someone else’s greed and lack of investment due diligence.

What was the response from international regulators of note?

The SEC began warning “startups that they could be violating securities laws with the token sales. In an investor bulletin, it warned of the potential for fraud, scams and hacking. It will treat some ICOs as IPOs — as security offerings, in other words, with all the registration requirements that entails, unless a valid exemption applies.”

China banned them, while the FCA in the UK jumped upon the bank wagon: “The FCA has added its voice to other watchdogs around the world, issuing a formal consumer warning about the risks of Initial Coin Offerings, or ICOs. ICOs are very high-risk, speculative investments. Investors should be conscious of the risks involved and fully research the specific project.”

Our conclusion at the time was: “With over a thousand existing offerings and more to come, it is highly unlikely that many of these experimental projects will succeed. Fraud is also a given, but this craze is very reminiscent of the Internet some years back, when investors threw money at anything that involved the world wide web. Far too many entities are scrambling for far too few opportunities. Many will fail. Many investors will lose their entire investment.”

What form do the various types of Crypto-ICO scams take?

Whenever the popularity of anything soars beyond expectations, you can always assume that clever con artists are busy devising a new scam or leveraging one of their own tricks of the trade, which has been successful under other circumstances. When the focus is a financial service, the degree of attention from the criminal element in our society can be multiples higher. Such is the case with all aspects of crypto-currencies, including ICOs. The counsel from professionals, in case you are still interested, is to study the proposition as much as you can, and then study some more.

What form do these schemes take? Here is a basic list of five types to be wary of:

  • Pump and Dump: We will start with the simplest form, and, as the first few paragraphs of this article revealed, investors fall victim to this charade more often than not. Designated “pumpers” artificially inflate coin prices via whatever marketing route that produces results, then dump the coins to unsuspecting buyers. Always check to see if a recent surge has been exaggerated. It is not the time to buy.
  • Bitcoin Investment Package: This type of investment typically claims a steady investment return, well above market averages, to investors that jump in at the right time. Yes, if it sounds like a Ponzi scheme and the returns seem to high to be true, then you have been targeted. It’s time to walk the other way.
  • Multi-level Marketing Schemes: If you want to invest in Bitcoin or any other crypto-currency or ICO, you can easily find a broker that will service your account. Many consumers, however, get roped into elaborate schemes, where you can earn other points and privileges by selling participation rights to others. At the end of the day, your benefits will dry up, and your investment will disappear. The operators have a way of running off with your loot.
  • Mining Service Gambits: Yes, crypto-currencies are “mined” by entities loaded with hardware, utility access, and specialized software. The process is complicated, and, for that reason, scammers have an easy time convincing investors to get in at the mining level, where you cannot lose. The problem is that most of these schemes are fakes.
  • Fake ICOs: Unfortunately, crooks have gotten wiser over time. Previous fake ICOs appeared to have offices, a website, and talented individuals in charge, but a simple review of public records could scream, “Scam in process”. Today, you may need to check deeper into social media, actually visit the office, and look for more on the website than just grandiose claims of riches.

Five tips on how to avoid being taken in by an Initial Coin Offering scam?

Fake or not, CFTC Commissioner, Bart Chilton, has this to say about ICOs: “Potential investors should understand that while the crypto space, including ICOs, is exciting and can hold some potentially profitable opportunities, they are not traditional investment-grade opportunities. They hold, generally, greater risk and are a haven for bad actors. Investors should do deep due diligence to ensure their hard-earned money isn’t lost to some sleazeball.”

According to industry experts, these few tips may help you spot a fraud:

  • Research the Team: It may sound simple enough, but, if you are not dealing with reputable people or at least people that have had a great of experience in the cypto-currency field, then you might be headed for danger. Check, and keep checking again.
  • Does the Value Proposition make sense: Many entrepreneurs have latched onto ICOs as a method to raise capital for their special idea, without having to go through traditional fundraising avenues, which would require much more documentation. Make sure there is a viable product or service, and not just a “pie-in-the-sky” idea.
  • How is the money to be used: According to one attorney in this arena, “If there is no caveat or disclaimer as to where the money invested is going; when the sale is; or any links, news, or video/images to document what they’ve already done, all you have is a company or group of people who are just taking your money and you for fools.”
  • Ignore the hype – Look for traction: One blockchain industry CEO offers up this advice: “Never invest in a project that talks about the potential future value or returns of their token. Ignore hype and look at actual progression on stated milestones.” Before fundraising efforts begin, there should already be a history of successes, a product, and customers willing to buy it.
  • Do your legal homework: Lastly, check the public record for registrations or licenses. Has the group addressed possible issues with the SEC and other regulators? Due diligence, always!

Concluding Remarks

Investors in popular crypto-currencies like Bitcoin and Ethereum have either made a bundle in short order or are presently licking their wounds from the aftermath of the inevitable bursting of the crypto-bubble. Initial Coin Offerings (ICOs), once the rage, as well, are now deep in the dumpster, scrounging for respectability, running from investors and regulators, and suffering from one criminal scheme after another on their road to recovery.

Will they ever recover, or was this just another passing investment fad? Any possibility of a get-rich-quick path to enormous wealth has all but dried up, like snow in the desert. However, if there is still interest, at the very least, be cautious, do you own due diligence, and heed the warnings and tips that we have given you in this article. At the end of the day, if you suspect fraud, alert the authorities. Let your common sense prevail!

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