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The fraudsters, however, ensure that investors don't learn of the real source of funds. The omission in reporting is maintained for as long as new investors are joining and investing. It is further maintained provided most of the investors don't demand full payment. They believe that they still hold assets, which have already been used to pay previous investors.
In the crypto world, Ponzi schemes occur when the fraudsters establish fake crypto firms. They then try to attract investors by using stories and pseudo-statistics that are shams. The volatile nature of cryptos eases the selling of unrealistic profits.
Notable examples of Ponzi schemes in cryptos include Onecoin, which ran from 2014 to 2019. It compensated any new investors with cash and Onecoin, but it had no blockchain. So all compensation was based on a worthless asset.
Bitconnect was another Ponzi scheme that passed for a Bitcoin lending solution with an unrealistic figure of 40% returns. The 2016 launched scheme was responsible for the loss of $3.5bn by investors. Another notable mention is Miningmax which posed as a cloud mining venture. Its operations relied more on marketing to attract new investors rather than on returns from mining.
Gainbitcoin was an Indian 2016 scheme that offered an astonishing 10% monthly return for 18months. It also posed as a cloud mining firm, but there was no mining going on. Plustoken was a Chinese-based Ponzi that was responsible for around $3bn in investors' assets lost. It claims to offer wallet services and crypto literacy, but the ultimate aim was to convince investors to buy its native coin, Plustoken. The fraudsters then closed it in 2019 for no concrete reason.
The good news is there are ways of identifying Ponzi schemes. They all share several characteristics that make them stand out from other investments. They include;
Any crypto or other project that offers unbelievably high returns to investments with no risks screams a Ponzi scheme. The universal trend is that the higher the risks, the higher the rewards.
Low-risk investments tend to have meager rewards, while no-risk investments are almost non-existent. Any crypto project with very high returns but no risks means it probably offers old investors rewards from investments by new ones.
Any crypto investments backed by the blockchain and are involved in actual business tend to have irregular prices. Stablecoins are the exception, having static prices since they are pegged to an asset. When the crypto sector faces a bear market, almost all coins face a similar price trajectory.
If a project can maintain a stable (ordinarily high) level of price growth regardless of market conditions, it is likely a Ponzi scheme. One must review the crypto's use cases. If its operations are designed such that a good portion of its revenues is from other registered ventures, it may defy market movements and still grow. However, the growth will still not be regular and consistent.
Ponzi schemes rely on secrecy. Crypto-based Ponzi schemes usually have very high secrecy levels regarding the parent blockchain. It is important to note that confidentiality on a project's blockchain is different from without an open-sourced code. In the latter example, the blockchain's information is open to the public, but not everyone can edit its source code. Projects with solid development teams prefer such systems due to their ability to solve issues in-house.
Another trademark characteristic of Ponzi schemes is difficulty in cashing out. It usually happens during the latter stages of the project, with the fraudsters promising a higher return than before.
At this stage of the fraudulent project, they are usually trying to maximize the onboarding of new investors. The aim is to make away with as much investor capital as possible. Any sign of difficulty in making crypto withdrawals for investors is a definite red flag.
Ponzi schemes are a very dangerous occurrence to investors since the threat of loss could amount to billions of dollars. All investors need to familiarize themselves with the various tale-tale signs of how a Ponzi scheme works.
The best thing to look out for is a combination of several or all of the above factors. The most common one is very high returns on investments. These investments tend to be very consistent regardless of prevailing market conditions. Added features are high secrecy and difficulty in making withdrawals at the latter stages with the promise of higher returns. Any investor, whether in cryptos or other assets, must make sure to look out for these signs before committing their hard-earned money.