In this article today, we will be discussing the Ponzi scam. This type of scam has been around for a long time and has taken many forms. In the crypto world, there is no exception.

We will discuss what a Ponzi scam is, how it works, and some notable examples in the cryptocurrency space.

What is a Ponzi Scheme?

Ponzi scheme is named by Charles Ponzi, who ran a successful scheme in the early 1920s. It is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.

Ponzi schemes typically engage in activities such as selling a product or service that does not exist, promising excessive or unrealistic returns, or paying returns to initial investors with money invested by later investors, rather than from actual profits. 

Ponzi is named by Charles Ponzi, who ran a successful scheme in the early 1920s

How does the Ponzi scheme work?

The Ponzi scheme works by promising investors high returns for investing in a certain venture. The money that is invested is then used to pay off earlier investors, giving the appearance that the investment is profitable. However, eventually, there is not enough money to pay everyone back and the scheme collapses.

Today, there are many different types of Ponzi schemes, but they all have one thing in common: they rely on new investors to keep the scheme going. If there are no new investors, the scheme will eventually collapse.

The Ponzi scheme usually works like this: 

  • The promoter tells potential investors that they can expect to receive a very high return on their investment, often 30% per month or more. 
  • To convince potential investors, the promoter may also produce fake documentation to show how much money previous investors have made. 
  • Some early investors may actually get paid the promised returns as money flows in from new investors. This creates a false impression of sustainability and encourages more people to invest. 
  • Eventually, there are not enough new investors and the scheme collapses, leaving most people who have invested out of pocket. 
Bitconnect was a cryptocurrency Ponzi scheme that ran from 2016 to 2018

One of the examples in the crypto space: 

“Bitconnect was a cryptocurrency Ponzi scheme that ran from 2016 to 2018. The scheme offered investors high returns through an "investment" in their proprietary cryptocurrency, Bitconnect Coin (BCC). 

However, the Bitconnect Coin was simply a token created on the Omni Layer Protocol and had no intrinsic value. The high returns promised by Bitconnect were simply paid for by new investors, making it a classic Ponzi scheme. 

The scheme eventually collapsed in early 2018, when Bitconnect stopped paying out returns to investors and shut down its exchanges. This led to a sharp drop in the price of BCC, and many investors lost most or all of their money. 

This indictment alleges a massive cryptocurrency scheme that defrauded investors of more than $2 billion, said U.S. Attorney Randy Grossman for the Southern District of California.”

If you're thinking about investing in a Ponzi scheme, remember that if it sounds too good to be true, it probably is. Be sure to do your research before investing any money. And if you're ever unsure about an investment opportunity, it's always best to err on the side of caution and avoid it altogether.

Why do many investors still fall into the Ponzi scam?

Many investors still fall into the Ponzi scam because they don't understand how these schemes work. Ponzi schemes promise high returns with little or no risk. They often use new investors' money to pay promised returns to earlier investors, which gives the scheme the appearance of being profitable. But eventually, there are not enough new investors to keep the scheme going, and it collapses.

Ponzi schemes can be difficult to spot because they can look like legitimate businesses at first glance. But there are some warning signs that you can watch out for:

  • High Returns: This is perhaps the most obvious sign that something might be a Ponzi scheme. If an investment sounds too good to be true, it probably is.
  • Pressure to invest quickly: Ponzi schemes often try to pressure people into investing before they have a chance to think about it or do their research. They may say that the opportunity is only available for a limited time, or that you need to act now to get in on the ground floor.
  • Complex or secretive investment strategies: Ponzi schemes often use complex or secretive investment strategies that are difficult for outsiders to understand. This is done intentionally, to make it harder for people to figure out what's really going on.
  • Unregistered investments: Ponzi schemes often involve investments that are not registered with the SEC or other regulatory bodies. This is another red flag, as it means that there is no public information available about the investment.
  • Unknown or unproven promoters: Ponzi schemes are often promoted by people who are not well-known or have a questionable track record. Be wary of investing with someone you don't know or can't find information on.
  • Lack of transparency: Ponzi schemes typically lack transparency, making it difficult to understand how your money is being invested and what fees are being charged.

If you see any of these warning signs, be very careful before investing any money. Remember, if an investment sounds too good to be true, it probably is.

How to protect yourself against Ponzi Scams

Ponzi schemes are unfortunately all too common in the world of investing. In reality, the scammers are simply using money from new investors to pay off existing ones, giving the appearance of profitability. Eventually, the scheme collapses when there's not enough new money coming in to sustain it.

While Ponzi schemes can take many different forms, there are some common red flags that you can watch out for. If you're approached about an investment that sounds too good to be true, be sure to do your research before handing over any money. 

Additionally, be wary of any investment that requires you to keep your money locked up for an extended period of time, as this could be a sign that the company is having cash flow problems. 

Finally, don't hesitate to ask questions - if the person promoting the investment can't give you clear and concise answers, it's probably best to steer clear.

While Ponzi schemes can be difficult to spot, being aware of the dangers they pose is the best way to protect yourself. If you're ever approached about an investment that seems too good to be true, remember to do your homework and ask plenty of questions before making any decisions. By taking these precautions, you'll be much less likely to fall victim to one of these scams.


Finally, you have learned about Ponzi scams and how they work. You have also learned about some of the common red flags to watch out for. If you are ever thinking about investing in something, make sure to do your research first and never invest more money than you can afford to lose.

I hope this article has helped you better understand Ponzi scams and how to avoid them. If you have any questions, feel free to leave a comment below and I will do my best to answer them. Thank you for reading!


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