How to tell if a cryptocurrency project is a Ponzi scheme


The crypto world has skilled a rise in Ponzi schemes since 2016 when the market gained mainstream prominence. Many shady funding packages are designed to benefit from the hype behind cryptocurrency booms to beguile impressionable buyers.

Ponzi schemes have turn into rampant within the sector primarily as a result of decentralized nature of blockchain know-how which allows scammers to sidestep centralized financial authorities who would in any other case flag or freeze suspicious transactions.

The immutable nature of blockchain programs that makes fund transfers irreversible additionally works within the scammers’ favor by making it more durable for Ponzi victims to get their a refund.

Talking to Cointelegraph earlier this week, Johnny Lyu, CEO of crypto trade KuCoin, mentioned that the sector was fertile floor for a majority of these schemes resulting from one essential motive:

“The trade is filled with customers keen to take a position their cash, and there may be nearly no regulation that may cease tasks from hiding their malicious intentions.”

“Till clear and internationally permitted monetary regulation of the crypto trade is ready in place, it’s going to proceed to witness the rise and collapse of Ponzi schemes,” he added.

How Ponzi schemes work

The Ponzi scheme phrase emerged in 1920 when a swindler named Charles Ponzi marketed a high-returns program to buyers which supposedly leveraged postal reply coupons to realize spectacular earnings. 

He promised buyers returns of as much as 50% inside 45 days or 100% curiosity inside 90 days. True to his phrase, the primary group of buyers acquired the claimed returns, however unbeknownst to them, the cash they acquired was really from later buyers. The cycle was designed to lure new buyers and enabled Ponzi to steal over $20 million.

Whereas he wasn’t the primary to make use of such a scheme to rip-off folks, he was the primary to make use of it to such a scale. Therefore, the approach was named after him.

In a nutshell, a Ponzi scheme is a faux funding program that guarantees astronomical beneficial properties to purchasers however makes use of cash collected from new buyers to pay early buyers. This helps the swindlers behind such operations to keep up some semblance of legitimacy and entice new buyers.

That mentioned, Ponzi schemes require a continuing move of money to be sustainable. The ruse normally involves an finish when the variety of new recruits falls or when buyers select to withdraw their cash en masse.

The way to spot a crypto Ponzi scheme

There was a pointy rise within the variety of Ponzi schemes lately in tandem with the crypto market’s uptrend. As such, you will need to know spot a Ponzi scheme.

The next are a few of the features to look out for when contemplating whether or not a crypto challenge is a Ponzi scheme.

Guarantees of ridiculously excessive returns

Many crypto Ponzi schemes declare to reward buyers with hefty returns with little threat. This, nonetheless, contradicts how investing in the true world works. In actuality, each funding comes with a certain quantity of threat.

Typical crypto investments fluctuate in accordance with prevailing market situations, so such claims must be considered as a pink flag. In lots of instances, buyers who be part of such networks by no means get any returns on their cash.

Khaleelulla Baig, the founder and CEO of KoinBasket — a crypto index buying and selling platform — instructed Cointelegraph that transparency must be the topmost issue to think about earlier than investing cash in a crypto challenge:

“What actually issues is the transparency concerning the challenge particulars. Most founders construct their enterprise on hope and rosy projections. Verify the previous observe file of the founding workforce’s supply observe file vs. dedication.” 

He additionally suggested buyers to steer clear of tasks with obscure fundamentals which are primarily based on exterior influences.

Unregistered funding tasks

You will need to verify whether or not a crypto firm is registered with regulatory organizations akin to america Securities and Alternate Fee earlier than investing any cash. Registered crypto firms are normally required to submit particulars concerning their income fashions to their respective regulatory authorities to keep away from penalties. As such, they’re unlikely to take part in Ponzi schemes.

Tasks registered in jurisdictions with lax crypto laws that moreover have Ponzi-like traits must be prevented.

Some jurisdictions, such because the European Union, have already provide you with elaborate crypto laws designed to protect crypto investors in opposition to a majority of these scams. In response to a latest proposal handed by European Council, crypto firms will quickly be obligated to abide by Markets in Crypto Belongings (MiCA) guidelines and shall be required to have a license to function within the area.

Placing crypto firms beneath MiCA will compel them to disclose their income fashions, and it will mood the rise of crypto enterprises counting on Ponzi-like plans within the bloc.

Use of refined funding methods

Ponzi schemes normally allude to advanced buying and selling methods as a part of the explanation why they can receive excessive yields with minimal dangers. Lots of their outlined development methods are normally exhausting to grasp, however that is normally finished on objective to keep away from scrutiny.

The Bitconnect Ponzi scheme that was unveiled in 2016 is an instance of a Ponzi scheme that utilized this tactic to trick buyers. Its operators inspired buyers to purchase BCC cash and lock them on the platform to permit its “refined” lending software program to commerce the funds. The platform claimed to supply monthly yields of up to 120% per year.

Ethereum co-founder Vitalik Buterin was among the many first notable figures to lift the alarm on the challenge. The scheme was introduced down by U.S. and British authorities, who declared it a Ponzi scheme. Its closure in 2018 triggered a BCC value drop that led to billions of {dollars} in losses.

Excessive degree of centralization

Ponzi schemes are normally run on centralized platforms. One crypto Ponzi that was primarily based on a extremely centralized community is the OneCoin Ponzi scheme. The pyramid scheme, which ran between 2014 and 2019, defrauded investors out of some $5 billion. The challenge relied by itself inner servers to run the ploy and lacked a blockchain system.

Subsequently, OneCoin may solely be traded on the OneCoin Alternate, its native market. The tokens might be exchanged for money, with fund transfers being made by way of wire.

The OneCoin market additionally had each day withdrawal limits that prevented buyers from withdrawing all their funds without delay.

The scheme went down in 2019 following the arrest of some key members of the operation. Nevertheless, there may be an impressive federal arrest warrant for OneCoin founder Ruja Ignatova, who remains to be at massive.

Multilevel advertising and marketing

KuCoin’s Lyu famous that the ominous pink flags hadn’t modified a lot through the years and multilevel advertising and marketing  was nonetheless on the coronary heart of many Ponzi schemes:

“Complicated incomes schemes involving a number of tiers of customers, referral packages, percentages, sliding scales, and different tips are all indicators of a Ponzi scheme that feeds the higher tiers utilizing the funds injected by the decrease tiers with out really doing any enterprise.” 

Multilevel advertising and marketing is a controversial advertising and marketing approach that requires contributors to generate revenues by advertising and marketing sure services and products and recruiting others to hitch the community. Commissions earned by new recruits are shared with the up-line members.

One Ponzi scheme that not too long ago made headlines for making use of this hierarchical system is GainBitcoin. The pyramid scheme headed by Amit Bhardwaj had seven major recruiters who have been primarily based in India and on totally different continents world wide. Every of them was tasked with recruiting buyers into the community.

The scheme assured customers 10% month-to-month returns on their Bitcoin (BTC) deposits for 18 months.

The scheme is alleged to have collected between 385,000 and 600,000 BTC from buyers.

Ponzi schemes have been utilized by scammers for over 100 years. Nevertheless, they’ve been in a position to thrive within the crypto trade as a result of lack of elaborate laws governing the sector.

As a result of the crypto world is prone to a majority of these schemes, you will need to train warning earlier than investing in any novel challenge.