Using blockchain technology, initial coin offerings have become an alternative means of securing financing for business projects using the new evolving digital token financial market. Unlike IPOs, which are subject to strict legal requirements, ICOs only require a white paper and some interesting features, such as a lack of barrier to entry, room for exponential growth, absence of geographic barriers, and easy validation.
Therefore, it is perhaps not surprising that the ICO market has recently experienced extraordinary growth. Research shows that from January 2016 to August 2019, ICOs raised nearly $ 13 billion worldwide.
Despite the attractive benefits of ICOs, investors interested in them as an alternative investment face some dramatic risks. In this regard, a 2018 report of Satis Research Group examined approximately 1,500 ICOs. Of the sample, 78% of the projects were identified as scams, with a combined value of $ 1.3 billion.
I have one with my colleagues Niranjan Sapkota and Josephine Dufitinema study that was to investigate and answer the following question: what are the different types of scams in the ICO market and what is the expected money loss of the average ICO scam? To investigate this issue, we applied web scraping and created an intensive data library for all ICOs launched from August 2014 to December 2019. Our unique hand-collected dataset included 5,036 ICOs.
We found data from the money raised for 1,014 ICOs, 576 of which turned out to be scams, totaling $ 10.12 billion in cumulative losses. The biggest loss through scams is the so-called ‘Petro scam, ”Of which investors lost a total of $ 735 million.
ICO scam categories
Dead, fake or both
We retrieved ICOs that were categorized as “listed” by dead project aggregators DeadCoins and Coinopsy and analyzed them to identify 13 different ways investors could be fooled by scammers. When a member of the Bitcointalk forum identified the ICO with a fake team, fake project, fake wallet, fake social media or fake trading, we categorized the ICO as ‘fake’.
The classic exit scam
If an ICO did not pay out promoters who were promised financial rewards (usually in the form of tokens) for PR activities such as promoting the project on forums, Telegram channels, messengers, document translation and localization, posting on social media or on blogs, we’ve categorized it as a ‘premium scam’. If the developers and promoters raising money for an ICO suddenly disappeared leaving investors with no information, we categorized those ICOs as an ‘exit scam’..“
Composite scams and exploding airdrops
We have observed many ICO scam allegations in which the same group of developers were actively running scams in other projects. This type of scam is categorized as “past scammers” in our investigation. We then defined “airdrop scam” for incidents where the scammers stole users’ private keys. This can happen if scammers create a booby trap and users, expecting to receive free tokens, click on the links, giving away their private information and eventually losing their coins.
Trade scams and the copy pasters
Additionally, developers seeking to mislead investors seemed to prefer to launch their ICO on a fraudulent exchange. This type of scam is categorized as an ‘exchange scam’. We also noted that copying the white paper of a promising ICO and launching it with a similar or different name is another deceptive tactic used among scammers. This type of scam is categorized as ‘white paper plagiarism scams’. In this regard, we noted that users are fortunately becoming familiar with this type of scam and are now reporting it on the Bitcointalk forum.
The pump and dump
“Pump and dump” is another strategy used by scammers, but it is not always immediately detectable at the start of an ICO. In this type of scam, investors and traders rush to buy the token at an early stage, when the price is still low, and some even buy at a high price for fear of missing an opportunity to make an easy profit. Once the scammers complete the sale, the price drops abruptly and dramatically.
Crypto Ponzi Schemes
A “Ponzi Scam” is another category of scam that is being observed. These types of scams typically require the victims to invest in one or more products or services associated with the ICO and promise a return at a later stage.
URL scams and phishing trips
We have also observed a new investor scam tactic involving launch websites that are similar in name and design to existing projects. Naive investors who are not aware of the original websites can be fooled by these sites and lose their coins. This category of scam is identified in our investigation as a “website scam”.
We know what you did last night
We have also observed what we describe as a “porn scam”, which seems to be gaining popularity among scammers, where an ICO pretends to provide premium access to its porn site (and / or products). Scammers may be taking advantage of this type of scam because users are less likely to report it as pornography is banned or viewed in many countries.
Market manipulation and pre-mining
We then defined another form of fraudulent ICO as a “pre-mine scam”, referring to tokens shared between developers and / or promoters after the last token sale has taken place instead of burning the unsold tokens, as in such cases is appropriate. This is simply deceiving investors because a higher token circulation offer implies a lower token price. In addition, the token market can be manipulated if developers keep a large portion of the tokens from the pre-mining phase. Another recent study is also interesting found it that pre-mining activity is tied to cryptocurrency default settings.
So what is the biggest ICO scam?
Our screening showed that the ‘phishing and fraud’ type is the most common, with users using spam emails, suspicious links and pop-ups, asking for personal and financial details, errors in withdrawals, withdrawals in progress, funds coming out of the wallet disappear and other dysfunctional operations.
Finally, using our plug-in estimator, we found that if an ICO business project turns out to be a scam, we can expect an estimated $ 54.1 million in losses, which is three times the overall sample mean of $ 17.58 million .
In summary, a lack of regulation allows developers and / or promoters to use more than a dozen tactics to fool investors. The money involved in this new emerging market is overwhelming. We argue that our findings have significant implications, including the need for government and regulatory ICO market rules to protect investors from serious losses.
This article does not contain investment advice or recommendations. Every investment and trade move carries risks, and readers should do their own research when making a decision.
The views, thoughts and opinions expressed here are the sole ones of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Klaus Grobys is a lecturer in financial economics at the University of Jyväskyla and an assistant professor of finance at the University of Vaasa. Grobys is also affiliated with the research platform InnoLab at the University of Vaasa. His recent studies investigate the opportunities and risks of new innovative digital financial markets. His recent research was covered by the American business magazine Forbes, among others.