How to Avoid Ponzi Scheme in Crypto Investing

How to Avoid Ponzi Scheme in Crypto Investing

The Ponzi scheme in cryptocurrency trading is a type of investment fraud scheme in which investors have to pay to enter the scheme. In Ponzi scam, investors’ money is paid with the money received from future investors. The Ponzi and the pyramid schemes have been around for a long time, and as the popularity of digital currencies has increased, so has the Ponzi scheme fraud in digital currency.

Ponzi scheme effect on digital trading

Who is Charles Ponzi?

Charles Ponzi is the man who deceived thousands of investors in the 1920s. He promised people that by investing in international postal reply coupons, they would make a 50 percent profit in less than 90 days. These coupons were less valuable in foreign countries, and Charles Ponzi exchanged them for higher value in his own country.

Naive investors also believed in his promises of a 50% profit. Charles Ponzi used the money he earned to make people believe his promises better and attract more investors, and paid huge profits to several investors within 45 days.

This made him more reliable and credible, and in a few months he managed to raise $20 million. He even managed to receive $1 million once in 3 hours.

Ponzi’s plan later collapsed because he was unable to pay investors. At that time, he lost between 7 and 15 million and caused the bankruptcy of 6 banks. The government arrested him on fraud charges.

Charles Ponzi

He was sentenced to five to nine years in prison and was later released on bail. After his release, he started the Charpon Land Association in Florida, where he sold underwater real estate. Authorities arrested him again and he was finally released in 1934.

What is Ponzi scheme?

In general, Ponzi projects use the money raised by new investors to pay off old investors. Ponzi scammers often promise investors that they will make a profit with little or no risk. However, the main purpose of these scammers is to make a profit for the rest of the scheme, they only resort to these professions to show the validity and safety of the Ponzi scheme.

The Ponzi scheme, which some mistakenly call the pyramid scheme, is a scam in which new members are promised that they will make a high profit if they invite new members to the scheme. As the members of this project expand, the invitation of new members to the project becomes more difficult and gradually the plan collapses.

Bitcoin on pyramid

Ponzi schemes are often seen by people as a kind of legal multi-level marketing. A multi-level legal marketing system uses the profits from downstream sales to pay its employees. Yet, Ponzi schems have almost no legitimate sales and the initial investors’ profits are paid through the sums that the new investors add to the plan.

What is the difference between a Ponzi and a pyramid scheme?

Ponzi and pyramid designs are very similar but not the same. The fundamental difference between the two types of scams is that a Ponzi scheme makes money by recruiting new victims and making false promises to them.

Pyramid schemes, unlike Ponzi, usually give victims the opportunity to make money by attracting more people to the scheme. The US Securities and Exchange Commission (SEC) and the US Commodity Futures Trading Commission (CFTC) have cracked down on perpetrators of both the Ponzi and Pyramid schemes and are working hard to arrest the fraudsters.

The name of the Ponzi scheme comes from a man named Charles Ponzi, who implemented the first Ponzi scheme in 1919. Charles Ponzi promised his investors that they could earn at least 50% profit from the International Response Coupon (IRC). Through international response coupons that allow the sender to pre-purchase postal packages, the recipient can exchange the coupon for a more expensive postage stamp.

Ponzi saw the different prices of other countries’ postage stamps as an opportunity to sell cheap postage stamps from other countries instead of expensive stamps. In this way, Ponzi made a lot of money by selling stamps at a higher price.

What is Ponzi Scam like?

Scammers use various methods and techniques to try to convince investors that their plan is a reliable and profitable one this consists of the followings:

  • Scammers attract investors by promising extraordinary returns. For example, a Ponzi scheme scammer promises investors that any investment they make in the scheme will yield a return of 25 percent or more.
  • Scammers never invest in this scheme. They just take people’s money and try to persuade more people to take part in the project.
  • They receive more money by attracting new investors and use part of that money to pay 25% of the previous investors’ profits.

This will continue as long as fraudsters can bring new investors into the scheme and use their money to pay off a portion of the previous investors’ profits.

International reply Coupon

What are the hallmarks of a Ponzi scheme?

Most Ponzi scheme scammers add new investors to their scheme in the following ways:

High efficiency with minimal loss or risk

In fact, every investment has its risks and risks and no investment is safe. In principle, the greater the investment and the greater the profit, the greater the risks. Therefore, if someone offers a high-yield, low-risk investment, it is more likely to be a scam and you will most likely not make any profit.

Efficiency and macro profit

Investments are constantly fluctuating and are never stable. For example, if a person invests in the stock of a certain company, his stock will not always be fixed and sometimes it will rise and sometimes it will fall.

Thus, investors should be wary of stocks that have consistently high returns regardless of market fluctuations.

Unregistered investments

Before transferring your assets to an investment, research the investment to see if the company is listed on the Securities and Exchange Commission or any other legal entity. If this investment is registered, you can access information about this company to know for sure whether it is legal and safe or not.

Unauthorized sellers

By law, people who introduce a project or investment to others must have a special license or be registered with a specific institution. Most Ponzi projects deal with unauthorized individuals and companies.

Secret and sophisticated strategies

Avoid investments whose practices and strategies are incomprehensible to you or conceal them.

How to recognize the Ponzi scheme in digital currencies?

There are many ways to identify a Ponzi scheme in digital currency, including:

  • Scam Ponzi schemes in digital currency attract investors to these schemes with the promise of big profits and high income.
  • They often promise a guaranteed return on investor funds. Keep in mind that return on investment is never guaranteed and there is always the risk of losing some of your capital.
  • Invest well in the platform or system before investing, and do not invest if you do not understand how to do business properly.
  • Scammers of Ponzi schemes in digital currency try to pressure you to put more money back into the scheme because they need the money to pay other people’s interest.
  • Invest your assets only in reputable institutions that you have properly researched.
  • People usually get to know this plan through friends or family members who have made some money this way. Ponzi scams use these marketing tricks because it is much easier for people to trust their friends and family.

Ponzi and pyramid schemes hide the real source of money by making multiple transfers between different accounts and use members’ bank accounts to transfer money. Investors are often unaware that they have committed money laundering. Because they have the income to do so, they allow their bank accounts to be used to direct money.

How to avoid Ponzi scams?

Numerous articles have been published by the FBI, the US Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) on the prevention of the Ponzi scheme. The recommendations of these organizations are:

  • Investigate the person who introduced the plan to you, whether the person is from an organization such as the Stock Exchange or the Financial Industry Regulatory Authority, and whether or not he or she has a license to work.
  • Thoroughly research the risk involved in this investment.
  • Get acquainted with present-day techniques that came from Business, and ask for details about them.
  • Know the background, success rate, experience and skills and training of the company. Get the company’s annual report, audit and financial statements from them.
  • Get help from a trusted person such as a financial advisor, lawyer or accountant.
  • Read written information such as information about the company, officers and their financial records, investment documents and expenses, market value and existing markets.
  • Any guarantee or financial regulation regarding the repayment of funds must be recorded in writing.
  • Ask the person offering the investment questions about their experiences and education and what institutions they have worked with. Also, ask about other costs or benefits of investing and how to make payments.
  • Be as careful as possible. Also, search the internet for their backgrounds and investments in investing companies and learn more about them.

What is Ponzi like in digital currency trading?

A few months ago, Gnosis technology developers sold $12.5 million of their native digital currency, the GNO Token, in just 12 minutes. The digital currency was praised by Forbes and the Wall Street Journal.

In Mumbai, meanwhile, police raided a company called OneCoin, which was selling its tokens, and arrested 18 members of the company.

Several national officials have said that Quinn One, which introduced itself as the new bitcoin, is now known as a Ponzi scheme in digital currency.

Unlike IPOs, ICOs are much more attractive to fraudsters. Initial coin offerings are not formally regulated by any financial authority.

However, Van Quinn raised hundreds of millions of dollars more than Genesis. He targeted a group of investors who were aware of the potential of digital currencies and Blockchain to thrive, but did not recognize the difference between a Ponzi scheme in digital currency and a successful project.

The risk of fraud in digital currencies is high because it is difficult for many non-experts to understand the basics of Blockchain technology.

In Conclusion

So what have we learned since Ponzi was arrested 100 years ago? Seemingly little. Last year U.S. law enforcement discovered 60 major Ponzi schemes, with victims investing $3.25 billion in these totally fraudulent scams.



Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store