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Cryprocurrency ponzi schemes. Do they exist and how to detect them?


Massimo Di Giuda

The emergence of blockchain and as a result the first cryptocurrency has been haunting millions of people across the globe. And while some are rushing to make money with cryptocurrency exchange rates, others are talking about the ponzi schemes. Bitnewstoday.com figured out if the scammers have something to do with bitcoins and whether fear of losing money is justified.

Who creates Ponzi schemes and how to make money on them?

What does the classic Ponzi scheme look like? This is an organization that pays money to investors through revenue paid by new investors. For example, there has been rumours about a promising project. Over three weeks some 30 investors have been found and each of them paid a thousand dollars. The ponzi scheme organizer gave all of the money to the first ten investors, that is $ 3000 for each. The information of 300% profitability in just three weeks has involved in this project one thousand participants within next month. But unfortunately they didn't see not only their profits but initial investments as well – the project organizers got away with all of their funds.

Here is a simplified scheme. There are usually more cycles to reach a larger audience and increase the pyramid's reliability for the investors. But the result is always the same – the project's founder leaves investors with their pockets empty. There can't be other variants since that little group of lucky people profit at the expense of newcomers. And this process has an exponential growth that can not be maintained consistently due to the payment mechanism itself. After all, money are not spent to produce goods or to provide services.

For example, the pension systems and health systems in several countries (including the US) are built on the pyramid principles. Money for pensioners and those who need surgery at the expense of labor force. And the aggregate growth in the share of pensioners makes the governments to increase pension contributions. But even this is not enough, so the state is forced to cover increasing costs at the expense of budget funds. Although this money is passed through investment funds, but their profitability is not enough so every year the situation only worsens.

What Bitcoin and Ponzi scheme have in common

There are a few signatures of financial pyramids.

Promise of high incomes. Now, when there are hundreds of investment options, the appearance of a new project is accompanied by advertising. What the company does, what profitability is planned, how these results are achieved. As for pyramids, information about the organizers is hushed up. What of this applies to Bitcoin? It has a founder, but there are still many doubts about his identity. That's all. Satoshi Nakamoto does not promise any profit, moreover he doesn't keep users' funds, they are mined by everyone. Therefore, the organizer in this case is just a spectator.

The money of new investors are paid to those who were the first. This principle is mandatory both for the classic pyramids of the times of Charles Ponzi and for the latest scams. In the case of bitcoin, there is nothing remotely similar to the above-mentioned scheme. The cost of this cryptocurrency is growing or falling under the influence of supply and demand on stock exchanges. The asset has its own pricing mechanism.

The organizer of the pyramid can close down the project whenever he wants and get away with the money of the depositors. Bitcoins, as already said, are not in Satoshi's hands. In addition, the founder of the cryptocurrency can't affect its future destiny, that contradicts the very nature of the financial pyramid.

The first investors get profit, while the last ones do not. In cryptocurrency trading there is no direct connection between the time of buying coins and the amount of income received. Anyone can earn, and at the same time the revenues are not guaranteed. That is, even the first participant can stay in the red if the rate drops right after the ICO.

And so on. There are no reasons to think of Bitcoin, Ethereum and other digital assets as a fraud. But there is bad news. There are some Ponzi schemes based on fictional cryptocurrencies. Their organizers try to sell the tokens. It is indeed a fraud. But in fact – it is the sale of fictional goods, as if someone decided to print pieces of paper and walk around a neighborhood proposing to exchange real money for this new "currency", which is kept in seсret by the government. That is an old proven scam, but with a different pretext.

To buy cryptocurrency or not, everyone decides for himself. Its price can either fall or grow. However it would be incorrect to treat digital money as a Ponzi scheme. After all, if a person buys euros for dollars and sells them 2 times more expensive – this does not make the US dollar a pyramid?

The opinion expressed in the article may not coincide with the position of the editorial board


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