More than once we have come across people who tell us “hey, man, I’ve got the solution to that financial problem you’re in”.
These people paint us a very promising future, where we manage a great flow of money and we can fulfill all our dreams, such as having a big car or a house.
However, when we hear what the “project” is about, we visualize a very particular structure.
In it, the idea is to start with an initial “investment” and, in addition, we must invite more people to be able to recover and multiply our income.
In this way, they swear that you will reach all your economic goals. Precisely, the great majority of these “propositions” are what we call “pyramids” or, in precise terms, Ponzi schemes.
Now, you may ask, what does that have to do with cryptos?
It’s a very good question with a simple answer: this type of scam has arrived, dangerously, in the crypto ecosystem.
Therefore, today we will talk about what a Ponzi scheme is and how it works, so that you do not fall into this fraud and take care of your investments.
What is a Ponzi scheme?
A Ponzi scheme, also called a pyramid scheme, is a form of investment fraud in which existing investors are paid with funds that are raised with money from new investors.
To do so, they promise you a high rate of return on the money invested, especially if you invite new people to join the project in an optimal time frame.
This is so that the money from the last “investors” is used to make the first return payments.
Additionally, the money you give to these people is used improperly, either by giving some of it to you so you think the business is working or by sending it to previous investors to keep them happy.
Certainly, the name “Ponzi scheme” is due to the famous Italian swindler of the 1920s, who used different names such as Carlo Ponzi, Charles Ponei, Charles P. Bianchi, Carl or simply Carlo.
To lure people into this type of fraud, he claimed that the investment returns were 50% profit in 45 days or 100% profit in 90 days.
As a result, he attracted thousands of people and millions of dollars in just a few days. Eventually, the U.S. authorities discovered him, putting an end to his business.
How does it work?
Normally, three parties are involved in its operation: the owner (scammer), old investors and new investors.
In fact, the ones who maintain the system are the new investors. With their money, the scammers will be able to pay the older members.
In this process, they also set aside their share and use it for their personal expenses.
The Ponzi scheme in the crypto universe
In cryptocurrencies, they work in two different ways:
- People who know about cryptocurrencies: To this population, they suggest solutions for abrupt changes in the value of cryptos. To this end, they demand payments in cryptoassets and use the irreversibility of transactions in the blockchain to avoid returning the money. It is usually present in cloud mining or crypto asset investment funds, but it is not so common.
- People who do not know about cryptocurrencies: Taking advantage of the fact that many do not know how they work, scammers promise daily profits from mining and trading investments.
Your associates may see their income grow through fraudulent websites, created by fraudsters to deceive their victims.
To get these people hooked, they use words like “multi level marketing”, “high yield investment programs” or “emerging market trading”.
In addition, they provide you with constant information through lectures, conferences, training, among others, so that you feel more confident and trust your “leaders”.
An example of this is in the case of Airbit Club, a company founded by Pablo Renota Rodriguez and Gutemberg Dos Santos in 2015.
They promoted their “business” through YouTube videos and meetings, where they solicited payments of $1,000 in exchange for memberships.
Its duration depends on two factors:
- Returns offered on capital: The more money is returned, the faster the system will fall, which means that new people cannot raise the money they “invested”.
- Number of new entrants: As we mentioned, new investors are the ones who keep the whole system going. The more people who manage to enter, the longer the pyramid schemes last.
However, this type of fraud has an expiration date in the medium and long term, since it becomes unsustainable to keep so many people inside.
How can I avoid falling into a Ponzi scheme?
Don’t believe in big promises, nor in investment returns that guarantee money at all times within the crypto markets, when we know that it is so unstable.
Always keep in mind that, in this universe, the market can go right or wrong and the mining difficulty can increase or decrease. Nothing is said and no one can promise it will be stable.
Likewise, be careful with projects that claim to generate significant daily profits or ICO‘ without projects behind them, because it will surely be a scam. Examples are One Coin, Bitconnect, IFan and Pincoin.
Finally, the most important thing is that you keep abreast of current events in the crypto ecosystem and set out to understand how this little world works.
That way, you will avoid easily falling into this type of “strategies”.
To do so, you can access Bitnovo’s weekly blog, where we bring you the latest and most interesting news about different cryptos, as well as the projects behind them.
Additionally, if you wish to invest, you can do it in a totally safe and fast way from Bitnovo’s homepage, which brings you closer to the diversity of existing cryptos in an instant.
That’s all for now, see you next time, Bitnauta!