As general interest in the cryptocurrency market continues to grow, Ponzi schemes are becoming just as rampant. Named after Charles Ponzi, a swindler from the 1920s, Ponzi schemes lure victims by promising astronomical returns.
Instead of depositing the victim’s money into an investment product, scammers who operate Ponzi schemes fund their own lavish lifestyles to create a flashy visual impression that makes the fraudulent investment appear to be a legitimate income source for the fraudster.
It’s critically important that cryptocurrency investors are able to recognize a Ponzi scheme. Knowing the signs of a fraudulent investment can help would-be investors avoid becoming victims of a serious financial crime.
The majority of people who invest in Ponzi schemes never receive a return on their investment. By the time they discover they’ve been scammed, the fraudster has typically spent their money and eventually cuts off contact with the victims.
What are pyramid schemes and the reasons behind their illegality? Let’s explore real-life examples to empower you with the knowledge to recognize and steer clear of these deceptive financial scams.
10 signs a crypto investment may be a Ponzi scheme
The following guide will show you how to spot a cryptocurrency Ponzi scheme, whether you’re a cryptocurrency novice or an experienced investor.
Learn how to protect your wealth against investment fraud. Explore common scams, warning signs, and proactive measures to safeguard your hard-earned money. Gain insights to make informed investment decisions and avoid falling victim to fraudulent schemes.
1. The investment promises unsustainable returns
Most Ponzi schemes are attractive because they promise unusually high returns. Occasionally, a legitimate investment opportunity may offer attractive returns. However, you’ll know a Ponzi scheme by its offer of returns that contradict conventional investment principles.
2. There’s a lack of transparency
Investors should first look for financial transparency before investing in a crypto project. A legitimate crypto project is usually operated by a founding team with a past track record that is readily searchable. Projects with unclear fundamentals that depend on external influences are often scams.
3. There’s no risk disclosure
Investments that yield higher rewards usually expose investors to higher levels of risk. Ponzi scheme fraudsters promise higher rewards with minimal risk. If a cryptocurrency investment opportunity sounds too good to be true, treat it as if it is.
4. You’re are unable to withdraw funds
People who have already invested in a Ponzi scheme eventually have difficulty withdrawing the proceeds of the fraudulent investment. The scammer may pressure victims to roll over the profits or delay taking a withdrawal. Fraudsters often promise even higher returns if the victim delays receiving a payment from the investment.
In reality, there’s no real investment product, and the fraudster has likely already spent the investors’ money.
5. You’re promised guaranteed returns
Another sign of a scam is the promise of consistent returns. Markets fluctuate; therefore, no cryptocurrency investment can guarantee consistent returns over time.
6. The investment strategy is confusing or complex
While there may be an initial learning curve for investing, Ponzi schemes appear to utilize complex strategies to justify the unusually high rate of return despite the minimal level of risk. Ponzi schemes are deliberately more difficult for investors to understand because adding confusion deters scrutiny.
7. You’re pressured to recruit others
The structure of a Ponzi scheme depends on the fraudster’s ability to continue bringing in additional victims as investors. Therefore, investors may feel like they’re being recruited to join a multi-level marketing (MLM) program or a pyramid scheme.
Learn the plain and simple distinctions, deceptive strategies, and real-life examples between a ponzi scheme and a pyramid scheme that prey on unsuspecting individuals.
The fraudster may also offer complex earning schemes and organize investors into different tiers of membership levels.
8. There’s insufficient documentation or information
As a crypto investor, one straightforward way you can protect your money is by checking to see if a crypto company is registered. Companies that register with the Securities and Exchange Commission (SEC) or another verified government agency are required to submit details about their revenue models.
If a company is registered with a government agency, there is a much lower likelihood of the organization operating a Ponzi scheme.
9. Commissions are suspiciously high
Schemes that entice investors to recruit more investors often promise unusually high commissions. Fraudsters promise existing investors that the new investors they recruit will share a portion of the commissions they earn when they recruit even more people to invest in the scheme.
10. The investment opportunity lacks a verifiable track record
Ponzi schemes are typically run by unregistered firms and advisors. Prior to committing to an investment opportunity, determine the relevant licensing agency.
Verify that the individual who is presenting the opportunity and the individual’s firm are both registered and properly licensed. Search for online reviews and other independent sources you can consult to check into the reputation of the firm and the individual who is presenting the opportunity.
When in doubt, consult an attorney or an investment manager to review the offer and determine whether you’re being targeted for a scam.
How to protect yourself from a Ponzi scheme
The best approach to protecting yourself from Ponzi schemes is to treat investing in cryptocurrency like any other major purchase.
- Check to see whether the parties involved are registered with a legitimate regulatory agency. Investigate the individual who presents the opportunity to you, and look for their past track record in finance.
- Avoid anything that promises astronomical returns, organizes investors by membership tier, or incentivizes you to recruit more investors to earn commissions.
- Always consult a legal expert and an investment manager before investing your money in an opportunity you don’t fully understand, and never allow yourself to be pressured to invest before you’ve done your research.
Exercising vigilance will help you avoid the Ponzi schemes that will inevitably emerge as more fraudsters leverage consumers’ interest in the crypto market.
If you suspect that a crypto investment opportunity may be a Ponzi scheme, it’s important to take action immediately. Report the suspicious activity to the proper authorities, such as the Securities and Exchange Commission (SEC) in the U.S.
Additionally, you should consider consulting with a criminal law attorney who can advise you of your legal rights and options.
Don’t let fraudsters take advantage of you—stay vigilant and protect your hard-earned money.