The cryptocurrency world has seen an rise the number of Scam Cryptocurrency /Ponzi schemes since the year 2016 when the market became popular. A lot of shady investment schemes are created to make use of the hype surrounding crypto booms in order to lure investors.
Ponzi scams are now widespread in this industry mainly because of the decentralization of blockchain technology, which allows fraudsters to avoid central monetary authorities that would otherwise block or flag suspicious transactions.
The invariable nature of blockchain systems , which guarantees that transfers of funds are irreversible helps in the fraudster’s favor, making it more difficult for victims of Ponzi to recover their money.
Talking to Cointelegraph earlier this week KuCoin Exchange Chief Executive Officer Johnny Lyu said that the industry was an ideal place to develop these kinds of schemes because of one primary reason:
“The industry is full of users eager to invest their money, and there is virtually no regulation that would stop projects from hiding their malicious intentions.”
“Until clear and internationally approved financial regulation of the crypto industry is set in place, it will continue to witness the rise and collapse of Ponzi schemes,” said the official.
How Scam Cryptocurrency / Ponzi schemes work
The Ponzi scheme was first mentioned in 1920, when a con artist known as Charles Ponzi advertised a high-returns scheme to investors that allegedly leveraged postal coupon coupons to make amazing profits.
The investor was promised a return that could be as high as 50% in 45 days, or 100% interest for 90 days. In keeping with his promises, the initial group of investors did receive the promised returns, but they were unaware that the money they earned came from investors who later invested. The scheme was created to attract new investors, and allowed Ponzi to steal more than 20 million dollars.
Although he wasn’t first to utilize this technique to deceive people but he was the first to apply it on an extent that was so large; thus the term “scam” was coined after him.
In simple terms A Ponzi scheme can be described as an investment fraud that promises massive returns to its clients, but it uses the money from new investors to pay the early investors. The swindlers who are behind the scheme to maintain some appearance of legitimacy, and to entice investors.
However, Ponzi schemes require a continuous flow of money to sustain their existence. The scam usually ends as the amount of participants is reduced or when investors opt to withdraw their money in large.
How do you spot a crypto Ponzi scheme
There has been an alarming increase in the number of Ponzi schemes over the last few years along with the cryptocurrency market’s rising trend. Therefore, it’s essential to know how to recognize the signs of a Ponzi scheme.
Below are some of the things to be aware of in determining if a crypto project is an Ponzi scheme.
Promising astronomically high returns
A lot of crypto Ponzi schemes claim that they reward investors with huge returns and minimal risk. However, this does not reflect how investing is actually done. In real life, every investment is accompanied by the risk of a certain degree.
The typical crypto investment fluctuates depending on market conditions, so these assertions should be considered an indication of trouble. In many instances those who invest in these networks do not receive any return on their investment.
Khaleelulla Baig, chief executive officer and founder of KoinBasket — a cryptocurrency index trading platform stated to Cointelegraph that transparency must be the first thing to think about prior to investing in a cryptocurrency project:
“What is really important is transparency of the project’s details. The majority of founders base their businesses on a hopeless basis and make optimistic projections. Review the history of the team’s performance in delivering vs commitment.”
He advised investors to steer clear of projects with a lack of fundamentals or are dependent on external factors.
Investment projects that aren’t registered
It is essential to verify the legitimacy of a crypto business licensed by a regulatory body like that of the United States Securities and Exchange Commission (SEC) prior to making any investment. The companies that are registered are generally mandated to provide information about their revenue model with their regulatory bodies in order to be protected from sanctions. Therefore, they are not likely to take part in Ponzi schemes.
The projects registered in jurisdictions that have insufficient crypto regulations and that exhibit characteristics reminiscent of Ponzi are not to be considered.
Some countries, including that of the European Union, have already created elaborate crypto-related rules created to safeguard investors in crypto from these kinds of frauds. In a recent plan that was approved by the European Council, crypto companies are soon to be obliged to follow Markets in Crypto Assets (MiCA) regulations and will be required to obtain an operating license for the region.
The putting crypto businesses under MiCA will force them to divulge their revenue streams and will halt the growth of companies who rely on Ponzi-like strategies within the bloc.
The use in sophisticated strategies for investing
Ponzi schemes typically refer to complicated trading strategies, which is the reason they can earn large yields while minimizing risk. A lot of their growth strategies are often difficult to comprehend, however they are usually designed with the basis of avoiding being scrutinized.
A Bitconnect Ponzi scheme that was revealed during 2016 provides an illustration of a Ponzi scam that used this technique to deceive investors. Its owners urged customers to purchase BCC coins and then lock the coins on the platform in order so that it could use the “sophisticated” lending software to trade the BCC coins. The platform claims to offer monthly yields that range from to 120% annually.
Ethereum founder Vitalik Buterin was among the first prominent people to raise the alarm over the project. The scheme was smashed in the hands of U.S. and British authorities who declared it to be a Ponzi scheme. Its demise in 2018 caused the BCC price reduction that resulted in billions dollars of losses.
Centralization at a high level
Ponzi schemes usually operate using centralized platforms. One cryptocurrency Ponzi built on the highly centralized network is one called the OneCoin Ponzi scheme. The scheme, which was operational between 2014 and the year 2019, defrauded investors out of around five billion dollars. The scheme was based on its own servers to manage the scheme and was not equipped with a blockchain.
In the end, OneCoins could only be traded via The OneCoin Exchange, its native marketplace. OneCoins can be traded for cash, while fund transfers are conducted through wire.
It was also noted that the OneCoin marketplace also included daily withdrawal limits that made it impossible for investors to withdraw all of their funds at one time.
The scheme was shut down in the year 2019 following the arrest of a few important members of the operation. There is however an unanswered federal arrest warrant to OneCoin the founder Ruja Ignatova, who remains in hiding.
In an interview with Cointelegraph about cryptocurrency Ponzis, KuCoin CEO Johnny Lyu said that the warning red flags haven’t changed too much in the past, while multi-level advertising (MLM) is still central to many Ponzi schemes:
“Complex earning schemes involving multiple tiers of users, referral programs, percentages, sliding scales, and other tricks are all signs of a Ponzi scheme that feeds the upper tiers using the funds injected by the lower tiers without actually doing any business.”
The multi-level approach to marketing has been criticized as a method that requires its participants to make money through the marketing of specific products and services, and encouraging new members in the group to become members. The commissions that new recruits earn are shared with up-line members.
The one Ponzi scheme that has made headlines because of its use of this hierarchy system is GainBitcoin. The pyramid scheme led by Amit Bhardwaj comprised seven principal recruiters Situated in India and across the globe. Each was charged with enlisting investors in the scheme.
The program promised customers a monthly return of 10 percent for the amount of their Bitcoin ( BTC) deposits for a period of 18 months.
The scheme is said to have raked in between 385,000 to 600,000 BTC of investors.
The Ponzi scheme has been employed by fraudsters for more than a hundred years. But, they’ve prospered in the crypto market because of the absence of rigorous regulations for the industry.
Since the world of crypto is vulnerable to these kinds of scams, it is crucial to be cautious prior to investing in any new venture.