This article is provided for information and education purposes only and is not intended as investment advice. Readers are encouraged to do their own research and consult a professional before making any investment decisions.
ICOs have been rightly criticized for being susceptible to scams, but a little basic due diligence can help any investor avoid potential trouble. And make no mistake; that due diligence is an absolute necessity, given recent history. After all, some cryptocurrencies have raised unbelievable amounts of money without ever producing a real product - just empty promises.
Vaporware is software or hardware that is announced publicly and actively promoted, even though it does not exist. Studies have shown that 81% of all ICOs have turned out to be scams, which highlights the lack of due diligence from investors who bought into these projects. The most striking factor in all of this is that even though an ICO turns out to be a failure or scam, the team behind it always walks away with money.
ICOs can be the perfect way to sell vaporware without anyone asking too many questions. Since it has become an industry norm to ask for the money up front, many investors have a naive sense of confidence in handing their money over to these startups. All it takes is one person earning a sizable return on their investment to compel others into making an investment, which is a very misguided line of thinking often driven by greed or fear of missing out. As a rule, unless the team who is raising funds can present a working prototype, you should not invest in their project.
Exchange Security Vaporware
Most exchanges are built on a nearly identical platform, and all employ the same basic security measures. To improve customer confidence, they will make it sound as though an exchange is unhackable because of its advanced software, even though they have the exact same level of security that everyone else does. If they do not have a GitHub or Sourceforge repository so users can verify the claims being made about their software, then chances are high that they don't actually have the software they claim. It is actually quite simple to keep your website or exchange secure, but all it takes is one mistake to compromise everything you have worked for. Often, these so-called exchange hacks are caused by human error, poor judgement, and lackadaisical security practices.
Dashlane password management has found that more than 70% of cryptocurrency exchanges leave user data such as passwords and account information highly susceptible to theft or fraud.
Investors Wising Up
A lot of these tokens are priced at a value which is pulled out of thin air.
Many investors are becoming increasingly knowledgeable about ICO scams, thanks to unbiased coverage from leading industry media outlets as well as some mainstream media outlets who cover the industry in an objective manner. Investors can protect themselves by doing a bit of due diligence on any project within the cryptocurrency space prior to making an investment.
1) Are they a registered business, and which authority are they accountable to? If the project's leadership has no accountability to consumer protection agencies, then chances are they will not maintain any level of personal responsibility in protecting investor funds. In this industry it is very easy and common for users to fake their credentials such as team members and physical address. You must make sure these are real people, and that they are the tenants occupying the address they claim to. An established business or reputable person will likely have a long track record, which will tell you a lot about what kind of person you are investing in.
2) Can you download a wallet or is there any evidence of the software they claim to possess? If they have not released any open source code for a working prototype, or have not launched a working platform, then chances are they have nothing other than empty promises. If you are not familiar with software, you should check with someone who is, because a lot of people will try to pass off junk code as evidence of their work; which is enough to fool uninformed investors into thinking their product is not just vaporware.
3) Do they have a block explorer? This is one of the easiest ways for beginners to verify that the project in question does indeed have a working blockchain that is in good health. Implementing a block explorer is a very simple procedure, and there are many third-party services who provide block explorers. There is no excuse for a blockchain project to be lacking a block explorer.
Many groups in the cryptocurrency space could likely be found guilty of false advertising due to their conduct. The practice of deceptive advertising has taken a serious toll on the rest of the industry's credibility thus far. Facebook and Google recognized this very early on and began enforcing advertising bans on ICO and cryptocurrency related products. Unfortunately, this blanket ban did encompass numerous law-abiding cryptocurrencies.
Throughout history there have been many false advertising scandals that resulted in prosecution, some of whom were not even acting with malicious intent. If Redbull can be sued for failing to give its customers wings, just imagine what kind of legal trouble awaits the false claims being made by vaporware dealers, who are hyping their products to make a quick exit. Most countries have extradition treaties with the United States, so even if you are on the opposite side of the world and defraud American investors, chances are the authorities in your country will apprehend you, then send you to the US for trial and sentencing.
It will be a costly process sorting out fact from fiction, and prosecuting those who break the rules. But what will be left standing are only the cryptocurrencies who are truly set on changing the world for the better, who prioritize continued fostering of innovation and development of our industry.