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Crypto Ponzi Schemes: How to Detect and Find One?

The trillion-dollar global crypto community is witnessing a growing prominence of Ponzi schemes. The trend has continued since 2016 when the digital assets market started gaining significant momentum. Countless fraudulent investment programs have been designed to capitalize on the mainstream crypto relevance and trick not only newcomers but often seasoned investors as well. This article will put the spotlight on Ponzi schemes utilizing crypto, and how to identify them. 

The Rising Growth of Crypto Ponzi Schemes

The decentralized traits of the underlying blockchain technology indirectly allow scammers to bypass centralized monetary regulators. Under normal scenarios, authorities would have flagged off suspicious transactions and frozen them. The rampant growth of crypto Ponzi schemes can also be attributed to the blockchain’s immutability, which renders transactions in the blockchain network irreversible. 

Plotting schemers are targeting the crypto community as the newly formed digital asset marketplace has several willing investors and a relatively lower amount of regulations compared to other asset classes. Stalwarts in the crypto industry are pushing forward recommendations for crypto regulations, but without stifling the rate of innovation. The only way to limit the damage done by Ponzi schemes is through functional regulation.  

Also Read: Crypto Regulations: The Need for a Compliance-Driven Crypto Broker Platform 

How Does a Ponzi Scheme Function?

The term Ponzi scheme arrived in the mainstream way back in the 1920s when notorious fraudster Charles Ponzi falsely marketed an extremely lucrative return program to investors leveraging post-reply coupons as the medium. Returns as high as 50 percent within 45 days, i.e. cent percent returns within 90 days were promised. The first lot of investors received their returns within the predetermined date, which in reality was provided using capital received from the next lot of investors. The loop continued, enabling Ponzi to steal over 20 million dollars in total. The scheme was not pioneered by Ponzi, but he helped popularize it. Hence, his name stuck around.

In short, the Ponzi scheme is an investment model that promises huge returns, but in reality, just uses funds gathered from new investors to offer the promised gains to the previous investors. The returns act as proof for the fraudsters to continue duping other potential investors through a fake sense of legitimacy and security. Ponzi schemes can be sustainable only when there is constant cash flow and fails when new recruitments decrease, or a large number of investors opt to withdraw their capital- all at once. 

Also Read: The Story of a $50M Superyacht, and Missing Crypto Investors of 3AC

Spotting a Ponzi Scheme

Rising mainstream crypto adoption and relevance have resulted in a massive surge in crypto Ponzi schemes in recent times. The ability to differentiate a Ponzi scheme from normal crypto projects is thus vital for enthusiastic crypto investors. 

Investors should look out for the following to prevent being a victim of a crypto Ponzi project:

  • Claims of Unrealistically High Returns

Several Ponzi crypto projects promise high returns to investors with negligible risk. This is in reality a contradiction to the principles of practical investment. Investment and asset management activities are never without risks. In fact, risk and returns are mostly proportional.

The valuations of traditional crypto projects also vary as per market conditions. Therefore, absurdly high returns should be seen as a potential red flag. There have been multiple reports of investors never getting back a single penny. 

  • Non-Registered Crypto Projects for Investment

Always check for the registration of the proposed crypto investment project. Check for their registration with regulatory authorities such as the US SEC(Securities and Exchange Commission) before allocating any funds to the project. Crypto companies that have undergone registration need to furnish revenue model details to the required regulatory agencies in order to avoid penalization. Therefore, they are also less likely to engage in Ponzi schemes. 

In addition, crypto projects that are registered in regions with relatively lax crypto laws but comprise features similar to Ponzi schemes should be avoided. The European Union has enforced strict MiCA(Markets in Crypto Assets) regulations that crypto projects are required to comply with in order to obtain an operational license across the region. The MiCA act forces crypto companies to reveal their working revenue model, ensuring the projects are not Ponzi schemes. 

  • Next-Gen Investment Strategies that Sound too good to be True

Ponzi schemes involving digital assets often market complex techniques to justify the reasons behind their proposed claims of high returns with minimal risk. The growth strategies may become too difficult to decipher- which is done intentionally for avoiding scrutiny. 

A notable example is the Bitconnect Crypto Ponzi trick that was discovered in 2016, Bitconnect operators advocated for the purchase of BCC tokens and lock the assets on their platform. According to them, the cutting-edge lending software would then allocate the BCC tokens for trading and could provide a monthly yield return as high as 120 percent per year. Vitalik Buterin, the co-founder of the Ethereum blockchain, was the first notable crypto celebrity to voice concerns about the project, which was later shut down by authorities from the US and UK after discovering the underlying Ponzi scheme. The forced closure of the project in 2018 wiped off capital worth billions from the market. 

  • The Organizational Structure features Centralization

Most Ponzi operations function on centralized crypto platforms. The OneCoin crypto project was a famous pyramid Ponzi scheme that operated from 2014 to 2019, wiping investor assets worth $ 5 billion. The project utilized its internal servers for operation and didn’t make use of blockchain technology. 

The OneCoin exchange permitted transactions only in the native OneCoin exchange marketplace. Tokens could be encashed, and the amounts were transferred into client accounts via wire. However, there were withdrawal limits restricting complete fund withdrawal at once. The exchange was shut down in 2019 after several key members of the organization were arrested.

  • Marketing at Several Levels

Ponzi schemes deploy multi-level marketing tactics that include referral programs, sliding scales, percentage commissions, and more. All these indicate the possibility of a crypto project being a crypto Ponzi scheme, and investors should preferably stay away from it. 

 Crypto Ponzi scheme GainBitcoin acquired 385k-600k Bitcoins using a hierarchical pyramid system, where commission amounts collected from the newly recruited investors were distributed among the upline personnel. Compared to other Ponzi schemes, the GainBitcoin scheme offered assurances of 10 percent monthly returns on BTC deposits for a period of eighteen months.                

Wrapping Up        

Ponzi schemes have existed for a long time and will continue to be utilized by scammers to dupe unsuspecting investors. The current increase in crypto regulations may help in reducing the number of crypto scams. However, investors should remain aware of crypto Ponzi schemes, and look out for the tell-tale signs to prevent becoming a victim.

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