Since experiencing tremendous growth with an increasing number of coins and projects, the cryptocurrency market also comes with the risk that many shady investment schemes are created the attraction of investors. Investors want to make quick profits, also known as the Ponzi scheme.
What is a Ponzi scheme?
According to the U.S. Securities and Exchange Commission (SEC):
“A Ponzi scheme is an investment scam that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk.”
The term Ponzi scam first appeared in 1920, when a swindler named Charles Ponzi advertised to investors a high-returns program that allegedly used postal reply coupons to generate remarkable gains.
He guaranteed investors 50% returns in 45 days or 100% interest in 90 days. True to his word, the initial set of investors received the promised profits, but they had no idea that the money came from subsequent investors. The cycle was meant to entice fresh investors, allowing Ponzi to take more than $20 million.
He wasn’t the first to utilize such a technique to defraud people, but he was the first to use it on such a large scale. As a result, the approach was named after him.
Cryptocurrency is a great target for Ponzi scheme masterminds. Average investors do not completely comprehend the technology behind Bitcoin or how to assess a cryptocurrency as a viable investment.
This opens the door for fraudsters to pose as specialists who can handle the tough technology and learning curve for you. They will offer you sky-high returns while assuring you that you will not need to comprehend the how of those riches. They’ll point to wonderfully created websites and extol the intellect of the project’s crew.
In a word, a Ponzi scheme is a phony investment program that promises clients exorbitant returns but utilizes money gathered from new participants to pay early investors. This assists the swindlers behind such businesses in maintaining some sense of respectability and attracting new investors.
Ponzi schemes have proliferated in the industry owing to the decentralized nature of blockchain technology, which allows scammers to avoid centralized monetary authorities, who normally flag or freeze questionable transactions.
The immutability of blockchain systems, which makes financial transfers irreversible, also works to the fraudsters’ advantage by making it more difficult for Ponzi victims to recover their funds.
However, to be sustained, Ponzi schemes require a steady supply of funds. The masquerade generally ends when the number of new recruits drops or when investors choose to withdraw their funds in bulk.
How to spot a crypto Ponzi scheme?
When determining if a cryptocurrency project is a Ponzi scheme, examine the following factors.
Very high returns with little or no risk
Many cryptocurrency Ponzi schemes claim to provide investors with large returns with no risk. This, however, contradicts how real-world investment works. In truth, every investment has some level of risk.
Investors should be skeptical of promises of guaranteed profits or high returns with little or no risk. All investments include some amount of risk, and investors should be wary of offers that appear to be too good to be true.
Returns with low volatility
Ponzi schemes guarantee extremely steady profits over time. Markets are inherently volatile. While long-term returns may look steady, short-term performance varies monthly. When claims of constant returns are made regardless of market conditions, red flags should go up.
Application of complex investing methods
Investors should be cautious when a plan may create returns only through a clever or hidden technique. If the mechanism of an underlying investing plan is difficult to grasp, the investment should be avoided.
Ponzi schemes frequently mention intricate trading tactics as one of the reasons they can achieve big rewards with low risk. Many of their indicated development techniques are often difficult to comprehend, but this is done on purpose to evade inspection.
Certain assets are inherently illiquid (startup investments, real estate, etc.), whereas cryptocurrencies are quite liquid. If a cryptocurrency investment is illiquid, the investor should understand why and clearly know when the investment will be liquid.
Multilevel marketing is a contentious marketing approach in which players earn money by promoting certain items and services and recruiting others to join the network. The commissions earned by recruits are divided with the members in their upline.
In the cryptocurrency sector, multilevel marketing is also applied to attract several investors who also think about maintaining the life of the plan.
Scammers have been using Ponzi schemes for almost a century. They have been able to grow in the crypto market, however, because of the lack of detailed rules controlling the sector.
Investors must be prepared for severe volatility and periods of poor or negative returns and ensure that their exposure to these speculative assets is acceptable for their intended risk, as with any innovative and technology-based asset. Doing your research is critical for crypto to keep you and your money secure.
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.
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