Coinputin.com – The first coin offerings using Blockchain technology, ICOs, have become an alternative way to finance projects using the new, evolving digital financial market for tokens. Unlike IPOs (IPOs), which are governed by strict legal regulations, ICOs require only a technical document and some interesting features such as the absence of entry barriers, exponential growth coverage, and the absence of geographical barriers.
So it may not be surprising that the ICO market has experienced phenomenal growth recently. From January August 2016 to August 2019, ICOs raised about $ 13 billion worldwide, research shows.
Despite the attractive benefits of ICOs, investors interested in them as an alternative investment face some significant risks. In this context, Satis Research Group’s 2018 report surveyed approximately 1,500 ICOs. Of the projects, worth a total of $ 1.3 billion, 78% were identified as fraud.
Klaus Grobys, an associate professor in financial economics at Jyväskyla university and professor of finance at Vaasa University, conducted the research together with colleagues Niranjan Sapkota and Josephine Dufitinema. The purpose of the research was to investigate and answer the question: What are the various types of fraud in the ICO market and what is the expected monetary loss of the average ICO scam? August 2014 December 2019 we have created a dense data library covering all ICOs launched, said Grobys, who shared his research with Cointelegraph. The unique, hand-collected datasets covered 5,036 ICOs.
They found data of funds collected for 1,014 ICOs, of which 576 turned out to be frauds. A cumulative loss of $ 10.12 billion in total. The biggest loss through fraud is “Petro-fraud,”in which investors lost a total of $ 735 million.
Classification of ICO scams
Dead and / or counterfeit coins
Grobys says: “We took DeadCoins listing Dead projects and ICOs classified as ‘listed’ by Coinopsy and analysed them to identify 13 different ways investors could be duped by scammers. If a Bitcointalk forum member identified the ICO with a fake team, fake project, fake wallet, fake social media, or fake trade, we categorized the ICO as ‘fake’.”
Classic exit scam
Grobys an ICO forums and his colleagues, Telegram channels, news sites introduce the project to translate and localize documents, social media, or posting on blogs for PR activities such as financial rewards (mostly in the form of token) can’t pay and the promise of it “Award fraud” clicking as he says. Developers and backers, who also raise funds for an ICO, classify these ICOs as an “exit scam/exit scam” if they suddenly appear, leaving investors without any information.
United crooks and exploding airdrops
“We have observed many ICO scams in which the same group of developers actively cheat on other projects. This type of fraud was categorized as ‘previous fraudsters’ in our study. We then used the phrase ‘AirDrop fraud’ for incidents where scammers steal private keys from users. This can happen if scammers create a booby trap and users wait to receive free tokens, click on links, thereby giving away their private information and ultimately losing their coins.”he says.
Stock market scams and copy-paste
Moreover, developers seeking to deceive investors seemed to prefer to launch their ICOs on a bogus exchange. According to grobys, this type of fraud is classified as “stock market fraud.” It is also observed that copying the technical document of a promising ICO and re-extracting it under a similar or different name is also a popular tactic used among fraudsters. This type of fraud is classified as “technical review plagiarism fraud”. In this context, the researchers observed that users were familiar with this type of fraud.
Pump and dump
“Pump and dump ” is another strategy used by scammers. But it is almost always undetectable at the start of an ICO. In this type of scam, investors and traders quickly buy tokens at the stage where the price is still low; some even buy at a high price for fear of missing out on the opportunity to make an easy profit. When fraudsters complete sales, the price suddenly drops severely.
Crypto ponzi scams
“Ponzi fraud” is another category of fraud that researchers have observed. In this type of fraud, typically victims are persuaded to invest in certain products or services associated with the ICO and given promises that they will get a return from them at a later stage.
URL and phishing scams
Grobys says of this type of fraud: “we have also observed a new fraud tactic involving websites similar in name and design to that of existing projects. Naive investors who do not know about the original websites can be deceived by these sites and lose their coins. This category of fraud was defined as a ‘website fraud’ in our study.”
“We know what you did last night”
In addition, researchers say they have also observed what they describe as “porn scams,” which appear to be becoming increasingly popular among scammers. An ICO appears to offer premium access to the porn site (and/or products). Grobys may be the reason why this has become popular among fraudsters; because pornography is banned or despised in many countries, users are less likely to report it to the authorities.
Market manipulation and pre-mining coins
Finally, the researcher defines this form of fraud as “pre-mining fraud”, referring to the fact that, instead of burning unsold tokens, they are shared between developers and/or supporters after the final token sale has taken place. In this case, investors are being conned, because a higher supply of tokens means a lower price of tokens. Moreover, the token market can be manipulated if developers retain a large portion of the tokens in the pre-mining phase.
So what is the biggest ICO scam?
Klaus Grobys summarizes his work as:
“Our review showed that ‘phishing and counterfeiting’ is the most common form of fraud. This is a situation where users face spam emails, suspicious links and pop-ups, questions for personal and financial details, withdrawal errors, pending withdrawals, lost balances from wallets and other dysfunctional operations.
Finally, we found that if an ICO project turned out to be fake, we expected an estimated loss of $ 54.1 million, about three times the overall average of $ 17.58 million.
In summary, due to a lack of regulation, developers and/or promoters can employ many tactics to trick investors. The money involved in this new, emerging market is huge. We argue that our findings have significant implications for governments and regulatory bodies, including the need for ICO market regulations, in order to protect investors from serious losses.”