Ponzi Schemes

A Ponzi Scheme is a common form of fraud that promises a huge yield for people who enter it. Criminals disguise this as a reliable form of investment. So, the scheme commonly uses some front of successful investment tactic (or something like that) to attract victims. The new victims put the money that goes to older investors and to the criminals.

Ponzi Schemes need a constant flow of money to survive. So, as long as they have more investors entering, these frauds have an illusion of sustainability. Eventually, it becomes hard to recruit new victims, or a large number of previous investors cash out simultaneously, then the Ponzi Schemes collapse.

The name of this form of fraud is after Charles Ponzi, an Italian businessman who had a legitimate work at the beginning with an arbitrage of international reply coupons for postage stamps. Later, he began attracting new investors to transfer money to earlier investors and to himself. The scheme had a promise of astronomic returns, something in the range of 45% to 100% in 90 days. Ponzi received large coverage within the United States and other countries as a successful businessman until his scheme collapsed. It is registered that this kind of fraud is way before Ponzi, but it took his name because of his large notoriety.

One famous recent event of a Ponzi Scheme was with the famous investor Bernard Madoff. “Bernie” Madoff was convicted in 2008 for having the largest fraud scheme in history, involving billions of dollars from thousands of investors.

Frauds can occur with any object or theme that is known to have big gains in the past. For example, criminals in the U.S. used oil to sell lands that they did not have to naïve victims, only with promises and good selling skills. In the Crypto Market, this is not different and can happen too.

Cryptoassets are not a crime itself, but an instrument. We can’t condemn the process of banking because some banks are having fraudulent schemes, like laundering money. People commit these crimes, not the banks or the cryptoassets. Banks and cryptoassets are instruments and processes that help economies to grow.

To end this article, I would like to point out some red flags to watch in a suspicious Ponzi Scheme:
- High returns relative to investment pairs.
- Little or no risk.
- Consistent high returns.
- Unlicensed sellers or investors.
- Complex strategies.
- Difficulty to receive payment.
- Issues with accountability and taxes paperwork.
- Pressure to roll over the principal and/or the profits near the maturity date.