DECRYPT: Due diligence imperative before investment

It is time to take a deeper dive to become aware of the red flags before we invest into a virtual digital currency. Every month, dozens of new cryptocurrencies are launched and alongside these new tokens and coins come a series of initial coin offerings (ICOs). While the appetite among a broad pool of investors has been on the rise, there is a flip side too. The opportunities also combine to entice scammers. After all, if investors have proven they are willing to put up money toward a highly-speculative cryptocurrency, they seem equally likely to invest in fraudulent tokens or ICOs.

Blockchain and cryptocurrency technology is developing at a rapid pace, and even experienced investors may find it hard to keep up with the terminology. While there’s no guarantee that any cryptocurrency or blockchain-related start-up will be legitimate or successful, the steps outlined below can safeguard one from falling prey to a scam.

It is essential to know the team behind the coin or token. Now, it’s increasingly common for scammers to invent fake founders and biographies for their projects. The best protection against this fraudulent tactic is to thoroughly research the individual team members of a project before you invest. It’s not a good sign for example, if you’re unable to find any information about a particular developer or founder on LinkedIn or other social media outlets. If profiles do exist, check to see if their activity seems to match up with the number of followers and likes they accrue. Individuals who rarely engage with their followers and yet have thousands of fans may not be real. Do the founders have the experience they claim to have? Is it relevant to the current project at hand? Do they have a body of work?

The whitepaper for a project is another yardstick to measure its veracity, for which a cryptocurrency or ICO is the foundational document. The whitepaper generally lays out the background, goals, strategy, concerns, and timeline for implementation for any blockchain-related project. Companies that have a flashy website may reveal they lack a fundamentally sound concept. Check out for spelling errors, improper grammar, non-factual information and more. Look for a whitepaper that indicates a rock-solid concept and a carefully conceived implementation plan. Read it thoroughly. Check to see if it has complimentary resources as well, including financial models, legal concerns, SWOT analysis, and a roadmap for implementation. A BIG red flag are companies that don’t offer whitepapers and these should be avoided at all costs.

An analysis of the whitepaper leads us on to the project feasibility. While it may seem obvious, ICOs, and cryptocurrencies with the greatest chances for success are those that have the fundamental structure to outlast their competitors. Many launches, even highly-publicised ones, have stuttered after initial interest faded.

Finally, observe the token sale. Any ICO will depend upon a token or currency system to facilitate the crowd-funding process. Legitimate companies and endeavours make the system itself and the progress of the token sale easy for potential investors to view. If a company makes it difficult for anyone to chart the progress of its ICO, this is a major red flag.

In conclusion, even the most successful ICOs and cryptocurrencies are criticised for fuelling speculative investing. The idea of getting rich quick on an investment in a hot new project is tempting for all of us. So spend time scrutinising detail, and assume that the absence of a piece of crucial information may be an attempt to hide an unsound model or concept. Remember, the gold rush is on but don’t be the one to buy fool’s gold!

Concluded

(The author is Founder, India Blockchain Alliance)