initial coin offering potential scams and fraud

UPDATE: New report from Bloomberg Research shows that over 80% of Initial Coin Offerings in 2017 were scams. This report substantiates that an ICO carries a significant risk that participants will lose their investments.

Continue reading before investing your hard-earned money in cryptocurrency.

If you are considering an initial coin offering investment, then be warned about potential scams. Government regulators are stepping up enforcement against fraudulent coin offerings and scams targeting retail customers (you and me).

What is an Initial Coin Offering?

image of coin representing digital currency

Initial Coin Offerings (ICO) are the digital currency market equivalent of stock market Initial Public Offerings (IPO) of company stock to the public.

An ICO is used to raise funds by issuing a new digital coin (cryptocurrency) to be used for company expansion, pay off initial investors or other business purposes. The new digital coin is exchanged for either cash, bitcoin, or another digital coin.

Why Invest in Initial Coin Offerings

Captain Obvious says the reason to invest in digital currency or ICO is to make money. A digital currency investment is much like investing in a currency or commodity. Profit is dependent upon a favorable price change large enough to cover transaction costs.

Investing in an ICO or IPO is the first opportunity the public has in getting in on the ground floor of a business opportunity. By assuming greater risk, an investor assumes greater reward.

How Risky are Initial Coin Offerings?

Given the lack of government regulation of digital currency markets, ICOs are risky. ICOs are risky because the markets are not doing well with self-regulation. We are seeing federal and state regulators stepping in to protect the public.

The U.S. Securities Exchange Commission, established by the Securities Act of 1933, regulates IPOs. The purpose of the Securities Act is to ensure disclosure of all material information to enable investors to make informed decisions. Until the Act was passed, regulation was left up to the individual states, which had a variety of inconsistent laws.

Jordan Belfort, “the Wolf of Wall Street”, was convicted and jailed for running a securities pump and dump operation. Belfort himself, who served 22 months in prison for securities fraud and money laundering in 2000, said that ICOs were

a huge gigantic scam that’s going to blow up in so many people’s faces” and that “it’s far worse than anything I was ever doing.”

Celebrities like boxer Floyd Mayweather and Paris Hilton may be trouble with the SEC over the endorsement of ICOs. The SEC has also filed fraud charges against PlexCoin.

Now, the SEC has stopped the ICO of Dallas-based AriseBank on the grounds of being a scam. AriseBank allegedly targeted retail customers to fund what it claimed to be the world’s first “decentralized bank.”

The SEC alleges that AriseBank falsely stated that it purchased an FDIC-insured bank which enabled it to offer customers FDIC-insured accounts and that it also offered customers the ability to obtain an AriseBank-branded VISA card to spend any of the 700-plus cryptocurrencies. AriseBank also allegedly omitted to disclose the criminal background of key executives.

Unless I am totally mistaken about how cryptocurrency blockchain technology works, the idea of considering crypto currency as a type of bank operation is phony baloney.

And we are years away, if ever, from the U.S. Federal Deposit Insurance Corporation insuring digital currency accounts.

What Makes Initial Coin Offerings So Risky?

ICOs are so risky because they are promoted with a great deal of urgency and without government oversight to ensure full information disclosure.

ICO promoters often use psychological urgency principle to influence purchaser/investor behavior. They use deadlines (clock countdowns) to create a sense of urgency. A sense of urgency causes the purchaser to act in haste and suspend rational thinking to avoid the fear of loss. “If I don’t act now, I will miss out.”

A sense of urgency may also be created by indicating there is a limited supply. Scarcity imparts a fear of loss on part of the purchaser.

ICOs are risky because of the lack of full information. There are no regulations specifying the amount of disclosure required that would enable investors to make informed decisions.

I have seen a number of business opportunities including cryptocurrency programs that lacked sufficient information.

For example, I have seen anonymous sales pages or have “talking head” or celebrity promoting a product. It is probably a scam. Scammers tend to hide behind anonymity to avoid contact with potential victims. Or hide previous criminal activity in the case of AriseBank.

Another scam warning is promoters using techo mumble jumble to describe their product of service. They make it sound so good yet offer no proof of validation. Fraudsters typically hide their fraud behind a smokescreen of technical or complex terms.

But then if you must invest in ICOs, consider the following investment tips.

Initial Coin Offering Investment Tips

When it comes to investing in initial coin offerings, the operative word is PRUDENCE. I suggest the following tips to help with your investment:

  • Do your homework, research, due diligence to determine whether the investment is appropriate.
  • Manage your expectations. An old Wall Street saying goes like this, “Bulls and bears make money. Pigs get slaughtered.”
  • Don’t invest more than you can afford to lose. I personally expect to lose it all. So my digital currency investments are small.
  • Expect price volatility, big swings both up and down. This is the result of the amount of fraud, particularly pump-and-dump schemes, in the digital currency exchanges. (So much for digital currency market self-regulation.)

However you decide to invest, I wish you the best of success. Just be careful with the various types of cryptocurrency scams.

I appreciate any and all comments about initial coin offering scams or your experience with any ICO. Please fill in and submit the form below.

12 Thoughts to “Initial Coin Offering Scams”

  1. Dave


    Thank you for this I enjoyed reading and especially since am huge fan of the cryptos , and I was wondering is there a way for someone to like identify a coin ICO that will actually thrive of on from one that will actually crush since coins are emerging from everywhere.

    1. Glen

      Dave, if there is a way to identify a coin that will be successful, I sure have not seen it. Ultimately, the market will decide which ones will be successful. Dogecoin was created as a joke coin in 2013 and yet it turned out to be very successful.

  2. Geoff

    That is so risky that it frightens me, not that I would ever invest in cryptocurrency unless there was some regulated support for the offer. What worries me is for those that least afford it, like retirees who are on fixed incomes and people who are gullible. You are doing a great job exposing these risky ventures

    1. Glen

      Thanks for commenting, Geoff. I am scared of investing in cryptocurrency. And I am a former commodities trader! I have not found any way to evaluate crypto investment risk considering how prices are manipulated (pump-and-dump) and how many scams there are.

  3. Brendon

    Great article on Initial Coin Offerings. I have been looking to get into the crypto currencies. However I also sort of feel that the bubble could burst at any time.
    With nothing backing these currencies, whos to say.
    i am really not sure which way I will go, but Thank You for the added knowledge!

    1. Glen

      Thanks, Brendon. I appreciate you taking time to read and comment. Yes, it is difficult to determine whether the crypto bubble has burst with the Bitcoin price plunge from $20K to well under $10K. Or whether there is another plunge in the future. 

      I have seen cryptocurrency technical analysis done that try to predict price trends and changes. However, I don’t have much faith that any analysis will help because of the rampant price manipulation in the crypto markets. 

  4. Aaron

    Hi, great post there with a lot of new information for me. I have been thinking about investing in crypto money, but one thing that kept me from it is that the opinions about it a very different. Which cryptocurrency would you invest in? or should I rather spread my investment all over them to keep the risk to a minimum?

    1. Glen

      Great questions, Aaron! I agree that opinions vary hugely with regards to crypto money. I am leery of those that are overly optimistic because they tend to be promotions for various crypto schemes. 

      But it all comes down to an investor’s tolerance for risk. Except for scams and schemes, high risk should provide high rewards. Spreading your investment over a variety of options will diversify your risk. But crypto investments will all move in the same direction given market conditions. Investors should evaluate crypto investments in relation to their overall investment portfolio. According to Modern Portfolio Theory, portfolios are constructed to maximize returns for a given level of risk. Consequently, you will see some investment advisors recommending a small level of investment in precious metals, currency, and other riskier investment vehicles.

  5. Dr. Doug

    Great advice. I have been considering crypto currencies for a while now and have been surprised to see so many new currencies hitting the marketplace. It appears to me that even the big names such as Bitcoin include quite a bit of risk, so is there any sense at all in investing in a crypto ICO?

    1. Glen

      Dr. Doug, there is a lot of risk in all of the crypto ICOs. SEC as well as several states, particularly Texas, are going after crypto scams. Mostly because these are in violation of securities laws. Some are outright frauds or Ponzi schemes like Bitconnect. 

      I would personally stay away from ICOs. As in the case of AriseBank, there is (or will be) a receiver to take charge of the company and its funds. So it would be awhile before any investors get any money back.

      The biggest problem with ICOs is that the investing public really has no way to evaluate an ICO and make an informed decision. In the securities industry, companies are required to issue a prospectus to investors. No equivalent law exists for ICOs. 

  6. Dave

    I looked at this because of the bitcoin slump. From ~20,000 to ~8,000….Insane. I wanted to invest in it, but couldn’t figure out why it kept going up. No intrinsic value and nobody uses it to buy anything. It seems like it was a pump and dump, the way it dropped.

    Is there any crypto currency that you think would catch on? By that, I mean people will actually use it to purchase stuff.

    1. Glen

      Thanks for commenting, Dave. I really do not see crypto currency being used to conduct business transactions (buying and selling merchandise and services) until two things happen. The price volatility needs to settle down. Right now the crypto is too volatile for sellers to price their products efficiently and remain competitive with currency. From the sellers perspective, it is difficult to determine value in crypto with crypto values massively fluctuating.

      The other thing is the speed of crypto transactions needs to be much closer to that of credit/debit card transactions at the point of sale. I don’t see sellers and buyers waiting for a transaction to clear before delivering products or services at the point of sale.

      The specific crypto currency that can solve these problems will be the winner. Kinda like the VHS and Betamax video tape format battle from years ago. 

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