An Initial Coin Offering (ICO), in simple terms, is a way for blockchain-related startups to raise funds. Akin to crowdfunding, the projects generally offer their own brand of 'tokens' in exchange for popular cryptocurrencies such as Bitcoin (BTC) or Ethereum (ETH).
The differences between an ICO and a traditional Initial Public Offering (IPO), in which company shares can be purchased in a traditional manner, are not only related to the purchase of tokens instead of shares.
IPOs worldwide are protected by financial authorities which ensure conditions and particular standards are met, however, ICOs are not protected by the same rules, which may place investor funds at risk with no hope of recovery when they are scams.
Like many angel investments in startups, it is a risk which may later offer good returns. Many ICO tokens promise high returns, which leads many to invest in the blockchain space.
If an ICO website looks professional, this may indicate a scam. Fraudsters will often spend a small fortune on a spotless website and marketing materials but this money is spent purely to promote trust in potential victims.
A return on investment (ROI) which seems too good to be true often is. In the case of Bitconnect, in which investors were offered a 120 percent return on their investment annually, the company performed an exit scam and rendered its tokens useless, leaving investors heavily out of pocket.
Blockchain-related startups appear, offer an ICO, and investors bite -- all without offering one whit of evidence to back up their claims.
If you cannot find project timelines, legitimate whitepapers, patents, or evidence to back up projects, steer clear or risk losing your funds.
If company websites, whitepapers, and project descriptions are full of fluff, buzzwords, and lack real substance, this is a clear warning sign that all may not be as it seems.
Research who is running the project to avoid failing for a fake ICO. A quick search can sometimes reveal who actually has experience in the field and who does not.
There are many ICOs out there which are legitimate and have been launched by people who truly believe in their projects.
Those that do will have legitimate social media accounts and email addresses -- and will be available to answer questions relating to their ICOs and blockchain development.
Some scam artists, however, may go so far as to create fake social media accounts to back up their claims, so take nothing at face value.
If the blockchain startup has no links to samples or code uploaded to repositories such as GitHub, this may be an indicator that there is no blockchain development to start with.
Suspicious ICOs will also ask investors to send their funds to a personal cryptocurrency wallet rather than a legitimate escrow service, and both practices may indicate a fraudulent token sale.