2017 was a big year for cryptocurrency. Blockchain news became common in mainstream media and Bitcoin became a household — the dictionary even added several blockchain related words! (See Blockchain and cryptocurrency earn their definitions in the 190-year Old Merriam-Webster for more details.)
In addition to gaining prominence, cryptocurrency also gained a reputation as a volatile investment with many unreliable altcoin cryptocurrencies jumping onto the blockchain bandwagon.
It’s simple to essentially quantify just how many Initial Coin Offerings, or ICOs, were in fact outright scams versus how many went on to form viable cryptocurrency.
New York-based Satis Group LLC, which was formed by those Argon Group fired last year, bills itself as a “premier ICO advisory firm.” Researchers Sherwin Dowlat and Michael Hodapp have now published a piece to classify and rank ICOs, ICO Quality: Development & Trading.
The cryptocurrency publication first categorizes ICOs into 6 groups: Scam, Failed, Gone Dead, Dwindling, Promising, and Successful.
“On the basis of the above classification,” Dowlat and Hodapp wrote, “we found that approximately 81% of ICO’s were Scams, ~6% Failed, ~5% had Gone Dead, and ~8% went on to trade on a exchange.”
Researchers defined a scam as “any project that expressed availability of [an] ICO investment (through a website publishing, ANN thread, or social media posting with a contribution address) did not have/had no intention of fulfilling project development duties with the funds, and/or was deemed by the community (message boards, website or other online information) to be a scam.”
“Failed” ICOs have “succeeded to raise funding but did not complete the entire process and was abandoned, and/or refunded investors as a result of insufficient funding (missed soft cap).”
ICOs in the “Gone” and “Dead” categories also succeeded in raising funds, went through the process but “was not listed on exchanges for trading and has not had a code contribution in Github on a rolling three-month basis from that point in time.”
“Dwindling” ICOs had success in funding and completion of the process as well as listing it on an exchange; however; they “had one or less of the following success criteria: deployment (in test/beta, at minimum) of a chain/distributed ledger (in the case of a base-layer protocol) or product/platform (in the case of an app/utility token), had a transparent project road map posted on their website, and had Github code contribution activity in a surrounding three-month period,” which the authors refer to as Success Criteria.
“Promising” ICOs encompass two of the criteria, and, finally, “Successful” ICOs fittingly have all criteria.
The researchers have said they “will continue to develop our research in this area and produce a more in-depth study in coming months.” In the meantime, they’ve taken a deeper look into their findings. “Within the 8% [traded on exchanges], in coins/tokens with a market cap of $50M+: ~47% were Successful, ~20% were Promising, and ~34% were Dwindling. In coins/tokens with an MCap of $50M — $100M (the lowest tier tracked): ~24% were Successful, ~22% were Promising, and ~54% were Dwindling.”
However, a different cryptocurrency study by MIT called Initial Coin Offerings and the Value of Crypto Tokens, authored by Christian Catalini and Joshua S. Gans, found only between 5% to 25% of ICOs are frauds. Adding yet a third opinion, news.Bitcoin.com stated 46% of Last Year’s ICOs Have Failed Already. Regardless of just how many ICOs are scams or not, it’s important to always guard yourself against such financially exploitative practices.
How can you stay vigilant about cryptocurrency scams?
In a nutshell, do your research and ask questions.
Discern any unique selling point in the positioning of the ICO. Ask yourself questions like, “What is so unique about the solutions that they are providing in the existing market space to justify their promises?”
Do a background check on the members of the team. Do they have a strong track record and reputation in their profession?
Pay attention to the language and focus of the white paper; it is vital to the fundamentals of the cryptocurrency company itself, but, there’s another critical reason to do the research.
We don’t normally think of money or business or stocks as emotional, but, that’s a fallacy. Finance is absolutely tied to our emotions. So, after and while reading the white paper, don’t focus on the details so much as your overall feelings.
Ask yourself: what is the primary emotion I feel about this ICO? Do I have a fear of missing out, or, am I honestly excited about the actual technology itself and/or the solutions it promises?
The vast majority of white papers associated with scam ICOs play very strongly on the concept of “fear of missing out” or FOMO as the young folk call it. FOMO indicates you’ve been emotionally manipulated by the wording and structure of the paper, mostly likely because it was capitalizing on the baseline of human greed.
Legitimate ICOs, however, tend instead to focus on the core unique selling point of technology, solutions, (and problems that necessitate those solutions). For more info on protecting yourself, check out previous article “Use These Tips to Avoid Bitcoin Fraud!”