By Ben Marks, Founder & CEO, Blocktrade Capital
There are hundreds of Initial Coin Offerings to choose from when considering investment options. Unfortunately, due to the rise in popularity of cryptocurrency, some bad apples have entered the space, and many of these ICOs are fraudulent. A recent ICO called Prodeum raised $6.5 million to build a database of fruits and vegetables on the Ethereum blockchain, but the team ended up vanishing with user funds before the ICO was complete. Scams like Prodeum are not uncommon, and investors should be on high alert for unscrupulous offerings like these. In this article, I will explore five red flags every investor should look at evaluating an ICO.
The Project Roadmap Is Longer than Usual
ICO project roadmaps generally average two years, so anything longer warrants a closer inspection. The roadmap is the timeline of the development for the ICO, and it should outline what the funds will be relegated for after the coin is launched. This roadmap should be extremely clear in its language and premise. Look for an explanation that’s more robust than just “the overly complex nature of the product requires several years to complete.”
Advisors from Multiple Other Projects On Board
The cryptocurrency space is still relatively new, and if a project’s advisors aren’t well-known (i.e. not Nick Szabo), it isn’t necessarily a red flag in and of itself. Every team needs to start somewhere, and a project with unknown advisors could be new to the crypto space and don’t’ have connections. The red flag to look for here is whether the same advisors appear on multiple other ICOs. If these projects are unrelated to each other, it could be a sign of an advisor attempting to stockpile tokens from as many different ICO’s as possible.
Unusually High Amount of Reserves
There are two potential paths for reserves to take. On the one hand, reserves are good if an ICO is using them to make sure funds aren’t allocated too early in the roadmap. It’s important that the team ensures there is enough capital to expand in the future in case the project ends up being very successful. But if the ICO lacks any clear statement as to who controls the reserves or why the amount is so high, it is a red flag that investors should scrutinize further.
Not Enough Info on How ICO Funds will be Spent
Whereas reserves are designed for use at some point in the future, funds raised from the ICO itself are available for immediate use. Teams should always provide a detailed outline for how the money will be spent. With fundraising amounts totaling in the tens of millions of dollars, it’s only natural for investors to question ICO hard caps. Make sure to always investigate where your money is going in an ICO, and look for as much detail as possible.
Too Much Token Allocation Given to Team
The founders of an ICO are entitled to a share of the total token supply, and this figure should generally be around 20%. Any amount higher than this should be clearly addressed within the white paper. The allocation percentage should be enough to preserve the ecosystem of the coin for future investment and growth, but not too high that it raises eyebrows. 20% is a fair amount, and anything more is a red flag.
Clear language and transparent goals are of the utmost importance when considering ICO investment. How the team will distribute your capital is the most important question to ask yourself when considering investing in an ICO. Looking out for these five red flags is a good way to weed out potential illegitimate ICOs, but as with any investment, thorough research must be performed before making investing decisions.
Ben Marks, Founder & CEO, Blocktrade Capital
Ben Marks is the founder and chief executive officer of Blocktrade Capital, a weighted index fund for crypto assets. The fund allows investors to hold a basket of the top cryptocurrencies that best contribute to the overall stability of the crypto ecosystem. Ben has been invested in Bitcoin since early 2014, and prior to that, he worked in Bank of America’s Home Loans division and Wells Fargo’s Asset-Based Lending Group. Ben holds a Master of Business Administration from the University of Southern California and a bachelor’s degree in management from Boston College. To connect with Ben, please find him on LinkedIn.