How to tell if a cryptocurrency project is a Ponzi scheme

The crypto world has skilled a rise in Ponzi schemes since 2016 when the market gained mainstream prominence. Many shady funding applications are designed to reap the benefits of the hype behind cryptocurrency booms to beguile impressionable traders.

Ponzi schemes have develop into rampant within the sector primarily as a result of decentralized nature of blockchain expertise which permits scammers to sidestep centralized financial authorities who would in any other case flag or freeze suspicious transactions.

The immutable nature of blockchain programs that makes fund transfers irreversible additionally works within the scammers’ favor by making it tougher for Ponzi victims to get their a refund.

Chatting with Cointelegraph earlier this week, KuCoin trade CEO Johnny Lyu mentioned that the sector was fertile floor for some of these schemes because of one foremost purpose:

“The trade is filled with customers keen to take a position their cash, and there may be nearly no regulation that will cease tasks from hiding their malicious intentions.”

“Till clear and internationally authorized monetary regulation of the crypto trade is ready in place, it’s going to proceed to witness the rise and collapse of Ponzi schemes,” he added.

How Ponzi schemes work

The Ponzi scheme phrase emerged in 1920 when a swindler named Charles Ponzi marketed a high-returns program to traders which supposedly leveraged postal reply coupons to realize spectacular earnings. 

He promised traders returns of as much as 50% inside 45 days or 100% curiosity inside 90 days. True to his phrase, the primary group of traders received the claimed returns, however unbeknownst to them, the cash they obtained was really from later traders. The cycle was designed to lure new traders and enabled Ponzi to steal over $20 million.

Whereas he wasn’t the primary to make use of such a scheme to rip-off individuals, he was the primary to make use of it to such a scale; therefore the approach was named after him.

In a nutshell, a Ponzi scheme is a faux funding program that guarantees astronomical positive factors to purchasers however makes use of cash collected from new traders to pay early traders. This helps the swindlers behind such operations to keep up some semblance of legitimacy and entice new traders.

That mentioned, Ponzi schemes require a relentless move of money to be sustainable. The ruse normally involves an finish when the variety of new recruits falls or when traders select to withdraw their cash en masse.

The best way to spot a crypto Ponzi scheme

There was a pointy rise within the variety of Ponzi schemes in recent times in tandem with the crypto market’s uptrend. As such, it is very important know methods to spot a Ponzi scheme.

The next are among the points to look out for when contemplating whether or not a crypto mission is a Ponzi scheme.

Guarantees of ridiculously excessive returns

Many crypto Ponzi schemes declare to reward traders with hefty returns with little danger. This, nonetheless, contradicts how investing in the true world works. In actuality, each funding comes with a certain quantity of danger.

Typical crypto investments fluctuate in keeping with prevailing market situations, so such claims ought to be considered as a purple flag. In lots of circumstances, traders who be part of such networks by no means get any returns on their cash.

Khaleelulla Baig, the founder and CEO of KoinBasket — a crypto index buying and selling platform — informed Cointelegraph that transparency ought to be the topmost issue to contemplate earlier than investing cash in a crypto mission:

“What actually issues is the transparency concerning the mission particulars. Most founders construct their enterprise on hope and rosy projections. Verify the previous monitor document of the founding group’s supply monitor document vs dedication.” 

He additionally suggested traders to avoid tasks with obscure fundamentals which are primarily based on exterior influences.

Unregistered funding tasks

You will need to affirm whether or not a crypto firm is registered with regulatory organizations similar to the USA Securities and Alternate Fee (SEC) earlier than investing any cash. Registered crypto firms are normally required to submit particulars relating to their income fashions to their respective regulatory authorities to keep away from penalties. As such, they’re unlikely to take part in Ponzi schemes.

Initiatives registered in jurisdictions with lax crypto laws that moreover have Ponzi-like traits ought to be averted.

Some jurisdictions, such because the European Union, have already give you elaborate crypto laws designed to guard crypto traders in opposition to some of these scams. In keeping with a latest proposal handed by European Council, crypto firms will quickly be obligated to abide by Markets in Crypto Belongings (MiCA) guidelines and will likely be required to have a license to function within the area.

Placing crypto firms beneath MiCA will compel them to disclose their income fashions, and it will mood the rise of crypto enterprises counting on Ponzi-like plans within the bloc.

Use of refined funding methods

Ponzi schemes normally allude to complicated buying and selling methods as a part of the rationale why they can get hold of excessive yields with minimal dangers. A lot of their outlined progress methods are normally arduous to know, however that is normally carried out on objective to keep away from scrutiny.

The Bitconnect Ponzi scheme that was unveiled in 2016 is an instance of a Ponzi scheme that utilized this tactic to trick traders. Its operators inspired traders to purchase BCC cash and lock them on the platform to permit its “refined” lending software program to commerce the funds. The platform claimed to offer month-to-month yields of as much as 120% per 12 months.

Ethereum co-founder Vitalik Buterin was among the many first notable figures to lift the alarm on the mission. The scheme was introduced down by U.S. and British authorities, who declared it a Ponzi scheme. Its closure in 2018 triggered a BCC value drop that led to billions of {dollars} in losses.

Excessive stage of centralization

Ponzi schemes are normally run on centralized platforms. One crypto Ponzi that was primarily based on a extremely centralized community is the OneCoin Ponzi scheme. The pyramid scheme, which ran between 2014 and 2019, defrauded traders out of some $5 billion. The mission relied by itself inside servers to run the ploy and lacked a blockchain system.

Subsequently, OneCoins might solely be traded on the OneCoin Alternate, its native market. The tokens could possibly be exchanged for money, with fund transfers being made through wire.

The OneCoin market additionally had day by day withdrawal limits that prevented traders from withdrawing all their funds without delay.

The scheme went down in 2019 following the arrest of some key members of the operation. Nevertheless, there may be an excellent federal arrest warrant for OneCoin founder Ruja Ignatova who continues to be at giant.

Multi-level advertising

Chatting with Cointelegraph about crypto Ponzis, KuCoin CEO Johnny Lyu famous that the ominous purple flags haven’t modified a lot over time and multi-level advertising (MLM) was nonetheless on the coronary heart of many Ponzi schemes:

“Complicated incomes schemes involving a number of tiers of customers, referral applications, percentages, sliding scales, and different tips are all indicators of a Ponzi scheme that feeds the higher tiers utilizing the funds injected by the decrease tiers with out really doing any enterprise.” 

Multi-level advertising is a controversial advertising approach that requires members to generate revenues by advertising sure services and products and recruiting others to affix the community. Commissions earned by new recruits are shared with the up-line members.

One Ponzi scheme that not too long ago made headlines for making use of this hierarchical system is GainBitcoin. The pyramid scheme headed by Amit Bhardwaj had seven main recruiters who have been primarily based in India and completely different continents all over the world. Every of them was tasked with recruiting traders into the community.

The scheme assured customers 10 % month-to-month returns on their Bitcoin (BTC) deposits for 18 months.

The scheme is alleged to have collected between 385,000 and 600,000 BTC from traders.

Ponzi schemes have been utilized by scammers for over 100 years. Nevertheless, they’ve been in a position to thrive within the crypto trade as a result of lack of elaborate laws governing the sector.

As a result of the crypto world is vulnerable to some of these schemes, it is very important train warning earlier than investing in any novel mission.