Financial scams take different forms. It could be anything from identity theft to investment scams, fake charities, pyramid schemes, and Ponzi schemes. Such scams used a variety of techniques involving phone calls, seemingly legitimate websites, and emails to scam individuals of their money or other assets kept in banks and similar financial institutions.
Now that crypto is a big thing where people put their investments, scammers have broadened their areas of operation and this demands some caution on the traders’ part, about which you can keep reading.
What is a Ponzi Scheme?
The scheme is named after Charles Ponzi, who scammed a group of investors in the 1920s by promising a 50% return within a month and a half, and a 100% return if the investors were ready to wait for three whole months, on an international coupon.
After paying off his earlier investors as promised, he continued this scheme for over a year and scammed $20 million out of his investors’ pockets.
Unlike a pyramid scheme which asks new members to recruit other people and pays off those high up in the pyramid from the entry fee the new joiners pay, a Ponzi scheme does not ask for investors to recruit.
Rather, it would look like a legitimate scheme with a central figure leading it and making promises, who pays off, again, the earlier investors from the investment amount collected from new investors.
Although slightly different, both these schemes depend on new people joining them, and once that stops, will end up collapsing.
Ponzi Schemes in the Crypto Industry
Statistics indicate that the number of financial scams is growing exponentially in the crypto world like anything as cryptocurrencies are being accepted as an approved mode of payment by many businesses. A good number of these scams are being carried out around the most popular token, Bitcoin.
Ponzi scams in crypto start as appealing business plans presented by scammers who offer high returns on investment within short periods. Then they apply the same strategies as Ponzi schemes working conventionally, taking money from new investors to pay off the earlier ones.
Once this flow of money reduces as traders stop joining the “business”, the majority of people who joined the scheme lose their investments in the blink of an eye.
Ways to Detect A Ponzi Scheme in Crypto
Now that the scammers have been invading the cryptocurrency space as they did with traditional investment methods and institutions, investors must know how to recognize them and how to protect themselves from such schemes.
With the whole system of blockchains and tokens being built on anonymity and decentralization, tracing these scams and the lost investment is harder than how it is being done in the real world.
So, the clever move would be to prevent getting scammed in the first place through the adoption of certain measures and by being cautious about the possibilities of such scams.
Claims of Consistent Returns
Is it entirely impossible to get consistent returns on crypto investments? The answer is no, but that happens very rarely. Moreover, no one can assure you consistent returns regardless of the market conditions and if they do, that is a red flag you need to look out for.
Guaranteed High Returns with Little to no Risk
Although they might vary in levels, cryptocurrency investments always involve some kind of risk. Higher returns most often come with an increased risk.
So, schemes offering higher returns but with no risk are something you need to do a thorough background check before investing.
Lack of Transparency
The business plans Ponzi schemers come up with, will often look doubtful and secretive. While legitimate businesses will provide potential investors with every necessary detail of the business and the people involved, Ponzi schemes do not do that.
So, if you find yourself questioning whether to invest in a business looking at its questionable strategies, trust your gut and walk away.
Unlicensed Brokers
Ponzi schemes usually involve individuals with no accreditation from state or federal governments. They might appear knowledgeable about the industry but as long as they do not possess a license, they are a threat to your investment.
No Working Product or Service
Although Ponzi schemes begin with a business plan, they lack a roadmap such as a whitepaper or a working product that legitimate business plans possess.
If a project lacks substantial information about what it does, it is no good to invest in and definitely something to watch out for.
How to Avoid Getting Scammed by Ponzi Schemes in Crypto?
Since you are aware of the signs to watch out for to identify Ponzi schemes in crypto, let us discuss how to protect yourself from such scams.
Check the Credibility of the Business
Always make sure the businesses and people you are involved with are licensed and have the required credentials. Check whether they are registered and licensed, and how they are reputed among the customers.
If you find any of these factors less than satisfactory, do not put your hard-earned money into such businesses.
Do the Research and Educate Yourself
Scammers target individuals with limited knowledge about the industry; about how it works and what to expect. Learn about the industry, blockchain, cryptocurrencies, NFTs, and other digital assets and how they work to provide you with a return on your investment.
Also, learn to research business plans presented to you to verify their legitimacy and credentials, which will come in handy when you get introduced to a Ponzi scheme.
Be Sceptical and Trust your Gut
Be sceptical of unsolicited offers and offers promising high returns with minimal risk. Such offers usually end up being a scheme to scam you off your investments and if you feel like you probably should not proceed with an investment, trust your instincts.
Also Read: Crypto Pig Butchering Scam: A New Digital Threat!
Conclusion
Ponzi schemes are scamming strategies designed to deceive individuals into giving up their money or sensitive information through a carefully built plan.
With the crypto industry becoming more popular and acceptable than ever, such scams are targeting the traders of various cryptocurrency platforms, hoping to get ahold of their investments and clear out without leaving a trace.
Since the foundational principles of the crypto world involve anonymity and privacy, carrying out this scheme is not difficult at all, unless they couldn’t convince people to invest in the scheme in the first place.
There are certain signs that could help traders detect such schemes if they are smart enough to recognize them. Unlicensed businesses, individuals without proper credentials, investments offering high returns but involving no risk, business plans with doubtful and secretive strategies, and businesses without a legible roadmap are some of these signs traders need to be cautious about.
To protect yourself from such financial frauds, learn about the space you are investing your money and trust in, do background checks, always be suspicious of deals that sound too good to be true, and if needed, seek expert advice on the matter.
No matter how good of a trader you are, always be cautious of things that could affect your investments and think twice before putting your hard-earned money into something that seems far-fetched.
