Using blockchain technology, initial coin offerings have become an alternative means of acquiring funding for business projects using the new, evolving digital financial market for tokens. In contrast to initial public offerings, which are governed by strict legal regulations, ICOs require only a white paper and some interesting features, such as a lack of barrier to entry, a scope for exponential growth, absence of geographical barriers and easy validation.
Hence, it may not be surprising that the ICO market experienced extraordinary growth recently. Research shows that from January 2016 to August 2019, ICOs raised nearly $13 billion worldwide.
Despite the appealing benefits of ICOs, investors interested in them as an alternative investment face some dramatic risks. In this regard, a 2018 report from Satis Research Group investigated approximately 1,500 ICOs. From the sample, 78% projects were identified as scams, collectively valued at $1.3 billion.
Together with my colleagues Niranjan Sapkota and Josephine Dufitinema, I conducted a study that was aimed to explore and answer the following question: What are the various types of scams in the ICO market, and what is the expected monetary loss of the average ICO scam? To investigate this issue, we employed web-scraping and created an intensive data library covering all ICOs launched from August 2014 to December 2019. Our unique, hand-collected data set covered 5,036 ICOs.
We found data of the funds raised for 1,014 ICOs, 576 of which turned out to be scams, totaling $10.12 billion in cumulative losses. The largest loss via scam is the so-called “Petro-scam,” from which investors lost a total $735 million.
ICO scam categories : Dead, fake, or both
We retrieved ICOs that had been categorized as “listed” by dead-project aggregators DeadCoins and Coinopsy, and analyzed them to identify 13 different ways that investors can be fooled by scammers. If a Bitcointalk forum member 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 failed to pay out promoters who were promised financial rewards (mostly in the form of tokens) for PR activities such as promoting the project on forums, Telegram channels, messengers, translating and localizing documents, posting on social media or on blogs, we categorized it as a “bounty scam.” If the developers and promoters who collected funds for an ICO suddenly disappeared while leaving investors without any information, we categorized those ICOs as an “exit scam.”
Compound scams and exploding airdrops
We observed many ICO scam accusations in which the same group of developers was actively conducting scams in other projects. This type of scam is categorized as “previous scammers” in our study. Next, we defined “airdrop scam” for incidents in which the scammers stole private keys from users. This can happen if scammers create a booby trap and users, expecting to receive free tokens, click on the links, thereby giving away their private information and ultimately losing their coins.
Exchange scams and the copy-pasters
Furthermore, developers intending to deceive investors seemed to prefer launching their ICO at a fraudulent exchange. This type of scam is categorized as an “exchange scam.” We also observed that copying the white paper of a promising ICO and launching it using a similar or different name is another deceptive tactic used among scammers. This type of scam is categorized as “white paper plagiarism scam.” In this regard, we have observed that users are fortunately getting familiar with this type of scam and now report it in 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 beginning of an ICO. In this type of scam, investors and traders rush to buy the token at an early phase when the price is still low, and some even buy at a high price in fear of missing out on an opportunity to make an easy profit. Once the scammers complete the sales, the price drops abruptly and dramatically.
Crypto Ponzi schemes
A “Ponzi scam” is another category of scam observed. This type of scam typically requires that the victims invest in some product(s) or service(s) associated with the ICO and are promised returns at a later stage.
URL scams and phishing trips
We also observed a new tactic of scamming investors that involves the launch websites that are similar in name and design to existing projects. Naive investors that are unaware of the original websites may be fooled by these sites and lose their coins. This category of scam is identified as a “website scam” in our study.
We know what you did last night
We also observed what we describe as a “porn scam,” which seems to be increasingly popular among scammers, whereby an ICO pretends to offer premium access to its porn site (and/or products). Scammers may be employing this type of scam because users are less likely to report it due to pornography being prohibited or looked down upon in many countries.
Market manipulation and pre-mines
Next, we defined another form of fraudulent ICO as a “pre-mine scam,” referring to tokens being shared among developers and/or promoters after the final token sale took place instead of burning the unsold tokens as is appropriate in such cases. This scams investors simply because a higher token circulation supply implies a lower token price. Furthermore, the token’s market can be manipulated if developers retain a large portion of the tokens from the pre-mining phase. Interestingly, another recent study also found that pre-mining activity is linked to cryptocurrency defaults.
So what's the biggest ICO scam?
Our screening showed evidence that the “phishing and fraud” type of scam is the most common, whereby users receive spam emails, suspicious links and popups, questions for personal and financial details, errors on withdrawals, pending withdrawals, balances disappearing from wallets, 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 general sample average of $17.58 million.
Summing up, due to a lack of regulation, developers and/or promoters can employ 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 ICO market regulations from governments and regulatory agencies to protect investors from severe losses.