How to Spot a Crypto Ponzi Scheme

The cryptocurrency market also comes with the risk of many shady investment schemes being attracted to investors due to the huge growth that has been experienced with the increase in the number of coins and projects. Investors want to make quick profits, also known as a Ponzi scheme.How to Spot a Crypto Ponzi Scheme

According to the U.S. Securities and Exchange Commission (SEC):

A Ponzi scheme is an investment scam that involves paying existing investors so-called returns out of funds provided by new investors. Organizers of Ponzi schemes often lure new investors by promising to invest their funds in opportunities that claim to generate high returns with little or no risk.

The term Ponzi scheme first appeared in 1920, when a con man named Charles Ponzi advertised to investors a high-return scheme that allegedly used postal reply coupons to generate substantial returns.

He guarantees investors a 50% return within 45 days or 100% interest within 90 days. As he said, the original investors received the promised profits, but they had no idea that the money came from later investors. The cycle was designed to attract new investors, taking the Ponzi scheme to over $20 million.

He’s not the first to use this tactic to deceive people, but he is the first to use it on such a large scale. Hence, this method is named after him.

Cryptocurrencies are an excellent target for Ponzi scheme masters. The average investor doesn’t fully understand the technology behind Bitcoin or how to value cryptocurrencies as a viable investment.

This opens the door to fraudsters who can masquerade as experts who can handle tricky techniques and learning curves for you. They’ll give you sky-high returns while assuring you that you don’t need to know the source of that wealth. They’ll point to well-created websites and compliment the ingenuity of the project staff.

How to Spot a Crypto Ponzi Scheme

Simply put, a Ponzi scheme is a fake investment scheme that promises high returns to clients but uses funds collected from new participants to pay early investors. This helps the crooks behind these businesses maintain a certain sense of dignity and attract new investors.

Ponzi schemes have exploded in the industry due to the decentralized nature of blockchain technology, which allows scammers to avoid central monetary authorities that typically flag or freeze suspicious transactions.

The immutability of the blockchain system makes financial transfers irreversible, which also makes it harder for victims of Ponzi schemes to recover their funds, giving fraudsters an advantage.

To sustain, however, a Ponzi scheme needs a steady supply of funds. Masquerade balls usually end when the number of new hires dwindles or investors choose to withdraw funds in large numbers.

Check the following factors when determining whether a cryptocurrency project is a Ponzi scheme.

Very high returns with little risk

Many cryptocurrency Ponzi schemes claim to offer investors huge returns without risk. However, this contradicts how real-world investing works. In fact, every investment carries some level of risk.

Investors should be skeptical of promises of guaranteed profits or high returns with little or no risk. All investments involve some level of risk, and investors should be wary of offers that appear to be too good to be true.

low volatility returns

Ponzi schemes guarantee extremely stable profits over time. Markets are inherently volatile. While long-term returns may appear stable, short-term performance varies month to month. When consistent returns are claimed regardless of market conditions, red flags should rise.

Application of complex investment methods

Investors should be cautious when planning to generate returns only through clever or hidden technology. Investments should be avoided if the mechanics of the underlying investment plan are difficult to grasp.

Ponzi schemes often refer to complex trading strategies, which is one of the reasons why they are able to achieve great returns with low risk. Many of the development techniques they point out are often incomprehensible, but do so to evade inspection.

lack of liquidity

Certain assets are inherently illiquid (startup investment, real estate, etc.), whereas cryptocurrencies are highly liquid. If a cryptocurrency investment is illiquid, investors should understand why and have a clear idea of ​​when an investment is liquid.

Multilevel Marketing

Multi-level marketing is a controversial marketing method where players make money by promoting certain items and services and recruiting others to join the network. The commission earned by recruits is split with the members upline.

In the cryptocurrency space, multi-level marketing has also been applied to attract some investors who are also thinking about maintaining the longevity of the plan.

How to Spot a Crypto Ponzi Scheme

Scammers have been using Ponzi schemes for nearly a century. However, they were able to grow in the cryptocurrency market due to the lack of detailed rules governing the industry.

Investors must prepare for periods of extreme volatility and low or negative returns and ensure that their exposure to these speculative assets is acceptable for their expected risk, just like any innovative and technology-based asset. Doing your research is essential for cryptocurrencies to keep you and your funds safe.

Disclaimer: The information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

Source of information: Compiled from COINCU by 0x information.The copyright belongs to the author Harold, and may not be reproduced without permission

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