What is a Ponzi scheme and why do a lot of persons become its victims? Is this fraudulent scheme widespread in the world of cryptocurrencies? In this short guide, we will look at all the nuances of this phenomenon and tell you how you can protect yourself from possible attacks.
What is a Ponzi scheme?
The classic Ponzi model is a form of investment scam. «Ponzi Scheme» got its name from Charles Ponzi, an American fraudster who operated in the 1920s. Buying International Reply Coupons in foreign territories and trading them at the prevailing market value in the U.S., he promised his clients a 50% return over 45 days or 100% profit in 3 months.
To give the investment scheme a semblance of legitimacy, Ponzi paid dividends to earlier investors at the cost of funds deposited by more recent investors — in other words, people did not actually profit from Ponzi’s business operations. At first, however, the scheme seemed quite workable and convincing, as each investor made a handsome profit.
Ponzi managed to carry out such operations for more than a year, after which the scheme was uncovered. It cost the «investors» $20 mln. Interestingly, Ponzi, although the scheme was named after him, was not the inventor of this type of investment fraud: similar episodes occurred since the 1830s. However, it was Ponzi who was able to successfully scale the scheme, so it became associated with this fraudster.
How do Ponzi schemes work in the world of cryptocurrencies?
In Ponzi schemes, fraudsters develop a business plan that generates revenue by attracting a large number of investors. The model demands a steady influx of cash, so the fraudsters utilize the money generated by new investors to make payouts to old depositors. Investors are sure that they are profiting from the business they have financed, but in fact they are throwing money away.
The period of constant and large profits ends when it becomes difficult for fraudsters to get new investors. Along with the cryptocurrency industry, Ponzi schemes are being used in other industries these days.
Decentralization, price volatility and other characteristics of cryptocurrencies make them attractive assets from the point of view of investors. The number of cryptocurrency customers around the globe is increasing geometrically, so it is not surprising that fraudsters are targeting this sector.
How to spot a Ponzi scheme in the world of cryptocurrencies?
There are certain markers to look out for when considering the prospects of a particular investment:
Promises of low-risk or no-risk investments
It is important to realize that investing involves risk. Like experts in investing frequently say: «The greater the downside risk, the greater the reward». But scammers frequently promise high yields from an almost risk-free investment. So if you hear such an offer, you may be trying to be lured into a Ponzi scheme.
Excessively stable yields
The movements of the financial market are not predictable, which is why the yield on investments isn’t necessarily constant. The price of cryptocurrencies can rise as well as fall, so be wary of investments that supposedly offer stable profits regardless of unstable market situations.
Non-regulated companies or firms
Scammers often operate investment structures that are not accountable to local regulators. This allows them to remain undetected and carry out their intentions. For example, in the United States, investment specialists are required by federal and state securities laws to be licensed. Yet the majority of crypto Ponzi models engage persons conducting investment transactions and giving advisory services with no actual license.
Business vision strategies that are difficult to understand or hidden from investors
Cryptocurrency investing can be a complicated enough process. But if the investment model looks like a rocket science diagram, and the consultant or company representative can’t simply and transparently explain how the business model works, that’s reason to be wary.
Problems receiving payments
If you’re having trouble cashing out or not receiving a payment, it’s important to clarify the situation. Scammers often convince their victims to «extend» or delay payments, promising even higher returns.
How can you protect yourself from Ponzi models?
Crypto pyramid scams, withdrawal fraud, and other forms of fraud are common, but they can be avoided. Here are a number of defenses.
Familiarize yourself with the ins and outs of cryptocurrencies and crypto trading
If you are new to the world of cryptocurrencies, be sure to learn how cryptocurrencies function before you start investing. Don’t invest in projects you don’t fully understand.
Check the reliability of crypto investment firms
As noted above, cryptocurrency Ponzi schemes are often run by unregistered firms. Be sure to check the reputation of the person or company before investing.
Seek the help of professionals
If you are presented with an attractive investment opportunity, you can always seek advice and help through investment advisors or attorneys that you trust and understand.
If you believe you have been the victim of a Ponzi scheme, contact lawyers who specialize in investment scams, regulators and law enforcement.
Don’t let your guard down!
Let’s be honest: Everyone wants easy money, so many people still fall into the traps of cryptocurrency pyramid schemes and other types of scams. Many people are attracted by false promises of «get rich quick» schemes. Just do not fall for such promises. Think twice before deciding to invest and never let your guard down.