Since the market’s mainstream rise in 2016, more Ponzi scams have been operating in the cryptocurrency industry. Numerous dubious investment schemes are created to deceive gullible investors by capitalizing on the enthusiasm around cryptocurrency booms.

Due to blockchain technology’s decentralised nature, which allows scammers to evade centralized financial regulators who would otherwise flag or freeze questionable transactions, Ponzi schemes have become widespread in the sector. The irreversible feature of fund transfers made possible by blockchain systems’ immutability also benefits scammers by making it more difficult for Ponzi victims to recover their losses.

According to Johnny Lyu, CEO of the cryptocurrency exchange KuCoin, said this week, this industry is ripe for these kinds of frauds.

Many consumers in the market are willing to invest their money, and there is almost any regulation to prevent projects from concealing their nefarious goals. Ponzi schemes will continue to rise and fall in popularity, and he continued, “until clear, accepted financial regulation of the crypto business is put in place.”

Workings of Ponzi schemes

The term “Ponzi scheme” first appeared in 1920, when a con artist named Charles Ponzi offered investors a high-returns program that purportedly used postal reply coupons to generate remarkable gains.

The scheme Ponzi used to steal more than $20 million was intended to entice fresh investors. In 45 days or 90 days, he guaranteed investors returns of up to 50% or 100% interest. True to his word, the initial investors received the promised profits; however, they were unaware that the funds came from later investors.

He wasn’t the first to con people using such a plan, but he was the first to do so on such a large scale. Consequently, the method was given his name. In a word, a Ponzi scheme is a fictitious investment program that solicits clients with promises of enormous profits while paying early investors with funds raised from new investors. This aids the fraudsters running such schemes in keeping up the appearance of authenticity and luring new investors.

However, Ponzi schemes need a steady stream of funding to remain viable. The scam usually ends when the number of recruits declines or investors decide to take their money out in large amounts.

Detecting a cryptocurrency Ponzi scam

In recent years, there has been an increase in the number of Ponzi schemes, coinciding with the upward trend of the cryptocurrency market. As a result, understanding how to recognize a Ponzi scam is crucial. Some characteristics to watch out for while determining whether a cryptocurrency project is a Ponzi scheme are listed below.

Assurances of absurdly high profits

Numerous cryptocurrency Ponzi schemes claim to offer investors significant returns with no risk. However, this goes against how investing functions in the real world. In actuality, there is some risk associated with any investment. Such promises should be taken as a warning sign because typical cryptocurrency investments fluctuate depending on the state of the market. Investors who sign up for such networks may never get a return on their investment.

Before making a financial investment in a cryptocurrency project, transparency should be the primary thing to think about, according to Khaleelulla Baig, the founder, and CEO of KoinBasket, a platform for trading crypto indexes.

“Transparency on the specifics of the project is what matters most. Most entrepreneurs base their companies on optimism and optimistic predictions. Verify the founding team’s historical performance in terms of commitment and delivery.

Additionally, he cautioned investors against investing in ventures with hazy fundamentals dependent on outside factors.

Investments that are not registered

Before making any investments, it’s critical to determine if a cryptocurrency company is accredited by regulating organisations like the Securities and Exchange Commission of the United States. To avoid penalties, registered cryptocurrency enterprises must provide information about their income models to their respective regulatory authorities. They are hence unlikely to take part in Ponzi schemes.

Projects with different Ponzi-like traits registered in countries with lax crypto rules should be avoided.

Some countries, like the European Union, have already developed intricate crypto legislation to safeguard cryptocurrency investors from these kinds of frauds. A recent proposal approved by the European Council states that cryptocurrency businesses will soon be forced to follow Markets in Crypto Assets (MiCA) regulations and would need a license to operate in the region.

Placing cryptocurrency businesses under MiCA will require them to disclose their income models, restraining the growth of Ponzi-style cryptocurrency businesses in the region.

Employing advanced investment techniques

Ponzi schemes frequently mention sophisticated trading techniques as one way they can generate tremendous rewards with little risk. Many of their claimed growth plans are typically difficult to understand to avoid examination.

A Ponzi scheme that used this approach to deceive investors is the Bitconnect Ponzi scheme, which was exposed in 2016. The platform’s owners urged investors to purchase BCC coins and secure them there to trade the funds using the platform’s “sophisticated” lending software. According to the forum, monthly yields might reach 120% annually.

One of the first well-known individuals to warn about the project was Vitalik Buterin, the co-founder of Ethereum. The Ponzi fraud was exposed by American and British authorities, who labeled it as such. Due to its closure in 2018, the BCC price fell, causing losses in the billions of dollars.

The elevated degree of centralization

Typically, centralized platforms are used to operate ponzi scams. The OneCoin Ponzi scam is one example of a cryptocurrency Ponzi that relied on a highly centralized network. The project lacked blockchain technology and ran the ruse on its internal servers. Between 2014 and 2019, the pyramid scheme duped investors of almost $5 billion.

As a result, OneCoin could only be exchanged on its market, the OneCoin Exchange. The tokens could be traded for money, and wire transfers were used to transmit the funds.

Additionally, there were daily withdrawal caps on the OneCoin exchange, preventing users from taking all their money at once. Following the arrest of certain vital members of the operation, the scheme was ended in 2019. Ruja Ignatova, the creator of OneCoin, is still at large, and a federal arrest order is still active for her.

Marketing on a multilevel

KuCoin’s Lyu remarked that multilevel marketing was still at the core of many Ponzi schemes and that the scary red flags hadn’t changed much over time:

“Complex earning schemes with many user levels, referral programmes, percentages, sliding scales, and other techniques  these signs all point to a Ponzi scheme that feeds the upper tiers with the money pumped by the lower tiers without really conducting any business,” the author writes.

An aggressive marketing strategy known as multilevel marketing requires participants to generate income by promoting specific goods and services and inviting new people to join the network. The up-line members receive a portion of the commissions earned by new hires.

Also, read – 4 Arguments In Favour Of And 4 In Against For Bitcoin Investment In India

GainBitcoin is one Ponzi scheme that recently gained attention for utilizing this hierarchical structure. Seven significant recruiters for the pyramid scam run by Amit Bhardwaj were stationed in India and several countries. The duty of bringing new investors into the network fell to each of them.

User IDs and email addresses traced by the Pune Police show that at least 1 Lakh people are victims of GainBitcoin scam across the countryhttps://t.co/hGhCk0wwOB

— Suprita Anupam (@karnanupam) June 10, 2022

For 18 months, the plan promised consumers 10% monthly returns on their Bitcoin (BTC) deposits. Investors are said to have paid the scheme between 385,000 and 600,000 BTC.

Scammers have employed Ponzi schemes for more than a century. They have succeeded in the crypto market, though, since there aren’t many complex rules governing it. Before investing in any innovative project, it is necessary to apply caution because the crypto industry is vulnerable to these kinds of scams.