In the last few years, there have been more cryptocurrency Ponzi schemes.

Since 2016, when the cryptocurrency market became popular, there have been more Ponzi schemes in the world of cryptocurrency. There are a lot of shady investment schemes that try to take advantage of the buzz around the cryptocurrency boom to trick investors who are easily swayed.

Ponzi schemes are common in the cryptocurrency sector, mostly because blockchain technology is decentralized. This lets fraudsters avoid centralized financial authorities that would otherwise flag or freeze suspicious transactions.

The fact that blockchain systems can’t be changed, which makes it impossible to undo money transfers, also helps scammers because it makes it harder for people who lose money in pyramid schemes to get their money back.

How does Ponzi Schemes Work

The term “Ponzi scheme” was first used in 1920 by a con artist named Charles Ponzi. He told investors that they could make a lot of money by investing in a program that used postage coupons. He told investors they would get back up to 50% of their money in 45 days or 100% per year in 90 days. The first group of investors got the returns they were promised, but the money they got came from investors who came after them. The purpose of the cycle was to bring in new investors, which let Ponzi steal more than $20 million.

He wasn’t the first person to cheat people in this way, but he was the first to do it on such a large scale, so the method is named after him.

In a nutshell, a Ponzi scheme is a fake investment program that promises customers astronomically high returns but pays off early investors with money from new investors. This helps the people running these scams keep up an appearance of legitimacy and find new investors.

Ponzi schemes, on the other hand, need a steady flow of money to keep going. Most of the time, the trick is over when the number of new hires goes down or when a lot of investors pull out their money at once.

How to detect a cryptocurrency Ponzi scheme

In recent years, there has been a surge in the number of Ponzi schemes in tandem with the upward trend of the cryptocurrency market. Thus, it is important to know how to identify a Ponzi scheme.

Below are some aspects to consider when considering whether a crypto project is a Ponzi scheme.

1.Promises of ridiculously high returns

Many cryptocurrency Ponzi schemes promise investors that they will make a lot of money with little risk. This goes against how investing works in the real world, though. In fact, there is some risk with every investment.

Crypto investments usually change based on how the market is doing, so such claims should be seen as a red flag. Most of the time, investors who put money into these networks never see their money again.

2.Unregistered investment projects

Before putting money into a cryptocurrency company, it is important to find out if it is registered with government agencies. Registered cryptocurrency companies usually have to tell the right regulators how they make money in order to avoid getting fined. So, they are probably not going to take part in Ponzi schemes.

Projects that are registered in places with weak regulations on cryptocurrencies and that look like pyramid schemes should be avoided.

Some places, like the European Union, have already made detailed rules about cryptocurrencies to protect crypto investors from ponzi schemes. The European Council just passed a proposal that says cryptocurrency companies will soon have to follow the rules of the Crypto Asset Marketplace (MiCA) and get a license to do business in the area.

Putting cryptocurrencies under the control of MiCA would force them to reveal how they make money and slow the growth of crypto-businesses that use Ponzi schemes like these.

3. Using complex investment strategies

Ponzi schemes often say that they can make high returns with little risk because they use complicated trading strategies. Most of the growth strategies they talk about are hard to understand, which is done on purpose to avoid being looked at closely.

4. High level of centralization.

Ponzi schemes typically operate on centralized platforms. The OneCoin Ponzi scheme is a type of cryptocurrency based on a network that is very centralized. Between 2014 and 2019, people who put money into the pyramid scheme lost about $5 billion. The project used its own servers to run the hoax because it didn’t have a blockchain system.

After that, OneCoin could only be sold on its own trading platform, OneCoin Exchange. The tokens could be traded for cash, and wire transfers were used to move the money.

The OneCoin trading platform also had limits on how much investors could withdraw each day, so they couldn’t take out all of their money at once.

In 2019, some of the most important people involved in the scheme were caught. But the founder of OneCoin, Ruzha Ignatova, has a federal arrest warrant and is still at large.

5. Multi-level marketing

Multi-level marketing is a controversial method of marketing in which people make money by selling products and services and getting other people to join their network. Higher-level members get a share of the commissions that new members earn.

GainBitcoin is a Ponzi scheme that uses this hierarchical system and has been in the news recently because of it. Amit Bhardwaj ran the pyramid scheme, which had seven main recruiters in India and on other continents around the world. Each person was given the job of getting investors to join the network.

The plan promised users a 10% return on their Bitcoin (BTC) deposits every month for 18 months.

Investors are said to have given between 385 000 and 600 000 BTC to the scheme.

Swindlers have used Ponzi schemes for more than 100 years. Still, they have been able to do well in the crypto industry because there aren’t many well-thought-out rules governing it.

Since this kind of scam can happen in the crypto world, it’s important to be careful before investing in any new project.

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