When statistics show that 81% of ICOs end up becoming scams, alarm bells should ring far and wide when it comes to investing in them. The market is flooded with unscrupulous individuals looking to secure as much funding as possible and leaving investors out of pocket.
Last month, we published a piece on the top five red flags to look for in ICOs. But since a month is a seriously long time in the crypto world, investors should exercise further caution. Not everyone has access to expert advice when it comes to crypto investing. Some of us simply choose to buy on an instinct, ride the wave of marketing hype, or carry out our own due diligence. But every now and then, we get lucky enough to glean some expert advice.
Ben Marks is the founder and CEO of Blocktrade Capital. Having invested in Bitcoin since early 2014, Marks worked for Bank of America and Wells Fargo’s Asset-Based Lending Group before founding Blocktrade Capital. As a weighted index fund for crypto assets, Blocktrade allows investors to hold a portfolio of the top cryptocurrencies, determined by a set of quantitative and qualitative factors.
For example, Marks looks out for coins that are less volatile than others, have been listed on reputable exchanges for a minimum amount of time, are both centralized and decentralized, and have a working product and track record of increased customer adoption. So, if you’re still thinking of investing in ICOs, here are five more red flags to look out for according to this expert.
Red Flag #1: Unusually High Token Allocation Given to the Team
“The team generally takes around 20% of the total token supply allocation. Amounts higher than this should be scrutinized carefully, especially if it isn’t addressed anywhere in the white paper,” says Marks. Remember the part about unscrupulous individuals looking for personal gain? Particularly pertinent here.
Red Flag #2: No Specific Detail on How ICO Funds will be Spent
Marks stresses the importance of asking the question of how the funds will be spent and what the company is planning to do after they raise the capital. “What will the funds be used for? How much of the funds will be spent during each year of the roadmap? What exactly will funds allocated to ‘product development’ be used for? These are all questions to ask yourself when evaluating an ICO. If there’s no specific detail given on how the funds raised will be spent, it could be a red flag.”
Red Flag #3: Longer than Usual Roadmap
This is a key point that’s often overlooked. Just having a roadmap in the first place often separates one shady ICO from the next. But be sure to actually check the roadmap out to see if it looks feasible or not.
Says Marks, “ICO project roadmaps generally average two years, so anything longer should be closely scrutinized. If a project with a five-year roadmap starts failing after one year, what’s to prevent the team from just pocketing the fundraised amounts budgeted for years two to five? Look for an explanation that’s more than just ‘the overly complex nature of the product requires five years to complete’.”
Red Flag #4: Unusually High Amount of Reserves
Reserves can be good or bad, as we discussed last month, but either way, they need to have a solid explanation. “A good use of reserves occurs when an ICO wants to make sure funds aren’t spent too early in the roadmap,” Marks explains. “If a project ends up being successful, the team wants to make sure there’s capital available to expand in the future. But if there’s no explanation for how the reserves will be spent, or who controls them, it’s a red flag.”
Red Flag #5: Same Advisors as Other Projects
You may have thought it was comforting to see the same trustworthy faces smiling at you out of the website, but having the same advisors on multiple projects isn’t necessarily a good thing.
“Advisors are tricky,” Marks warns. “If a project’s advisors aren’t well known then it isn’t necessarily a red flag, as the team could be new to the crypto space and hasn’t made any connections yet. But if you start seeing the same advisors on multiple ICOs, and the projects themselves are unrelated, it could be the sign of an advisor trying to stockpile tokens.” There’s also the chance of them being fake, with the team having no ties to the advisors at all.
So, if you’re still anxious to get in on this white knuckle ride, proceed with caution. And look out for the same red flags that top investors do.