Beware of the Ponzi Schemes – The Crypto Market is Riddled with Them

People from all walks of life have demonstrated their capacity to ignore common sense and believe in something that is simply too wonderful to be true by falling to the con man’s lure time and time again. With $2.50 in his pocket and hopes worth $1 million, Charles Ponzi went on to be known as one of the most notable scamsters in the history of mankind. Just like any other immigrant with eyes full of aspiration, he too wanted to experience the “American Dream”. But his idea of an American dream and opulence eventually turned out to be a nightmare for millions of people. He is the eponym for the infamous Ponzi Scheme. Ponzi schemes have been around for a hundred years and more, and yet they still dupe people into losing their life savings. This article will shed light on what Ponzi schemes are, how they operate, their history, and how to protect oneself from them.

Ponzi Scheme Explained

A Ponzi scheme is a type of scam that involves collecting funds from a group of people by enticing them to put in more money in return for a hefty sum of profit. The scheme survives as long as there are new investors coming in, and all it takes for the scheme operator to flip the switch and evade prosecution is to design a way to raise enough investment money to satisfy existing investors.

The name “Ponzi scheme” comes from Charles Ponzi, an Italian-born trickster who gained notoriety for using this fraudulent investment strategy in the early 20th century. Ponzi’s scheme promised investors hefty returns on international postal reply coupons, a type of coupon used for international mail exchanges. Ponzi would buy the coupons in one country and redeem them for a profit in another country, promising his investors quick and easy returns. But he was simply running a scam, one where the early birds were paid dividends with the unknowing investments of their successors.

How Do Ponzi Schemes Operate?

A Ponzi scheme is essentially an organized crime in which new investors allow their money to pay interest for old investors. The hallmark of these schemes is a process that operates in a sequence of:

Pitch

The scammer sells the scheme on the basis of never-before-seen interest rates and usually promises little or no risk. That is, these claims look too good to be true but lure unsuspecting investors desirous of making profits.

The Process of Investment

Attracting earlier investors is always done by making promises of extravagant interest rates and sufficiently convincing them to deposit their funds. A scammer might also present an investment, such as a business or financial product, that seems real to lend credence to their scheme.

Simulated Success

After the early investors have deposited their funds, the scammer starts distributing returns against their investments, generally from fresh money poured in by new investors. This creates an impression that the scheme is sound and profits are being earned.

Attracting a New Set of Investors

As more returns are reported by early investors, the number of latter investors anxious to enter the fray increases. New investors are drawn in by the promise of the same high rates of return.

The Cycle Goes On

In this process, the scammer uses the money of the new investor to make returns to older ones. The Ponzi scheme may expand and recruit more people into it, so the swindler may pocket a part of the money.

Collapse

Once the investments dwindle and not enough new investors come on board to keep up with the promised returns, the scam collapses. With that, returns fail, and investors lose their money. The scammer might seize that opportunity to disappear in the final days with the bit of cash remaining, leaving most investors in the absolute dust.

To understand a Ponzi scheme is to realize that no profits are being made; it is simply a redistribution of cash, wholly dependent on the constant inflow of new investors.

Why Do Ponzi Schemes Work (for Some Time)?

Their fraudulent nature notwithstanding, Ponzi schemes succeed for the following reasons:

Psychological Manipulation

The Ponzi scheme uses human emotions like greed, fear of missing out (FOMO), and trust. Promises of quick and easy wealth lure investors whose excitement or desperation to earn quick bucks might ignore obvious red flags or fail to adequately ask the right questions.

A Good Start

Initially, returns are given to early investors, generating positive word-of-mouth and attracting more investors. All these create an illusion of the legitimacy and success of the scheme, even though it is unsustainable in the long term.

Abuse of Trust

A Ponzi scheme often has a charismatic leader or organizer who seems trustworthy, and they are good at establishing relationships and creating an air of competence and success. Even if investors do not fully know where their money is going, they might still feel secure in the trust they put into it.

Fake Documents and Promises

Scammers give out fake financial reports, fake success stories, or even fake audits to convince investors that their funds are managed properly. These documents create an illusion of transparency and legitimacy and make it more difficult for potential investors to spot the scam.

Slow Onset of Collapse

Ponzi schemes look crystal clear in the beginning. Return is finally paid as promised, but this does not mean that collapse happens instantaneously; in many instances, it has taken years. The waiting and growth make it harder for investors to realize they are being fraudulent, punishingly referred to as “the look-in” or “too late” syndrome.

Red Flags of the Ponzi Scheme

While Ponzi schemes are set up to trick people, there are some warning signs that may be noted to disclose their deception before it’s too late. Important red flags include:

Unrealistic Returns

This is undoubtedly the clearest sign of a Ponzi scheme-the promise of extraordinarily high returns on investment with little. No serious and legitimate investment can guarantee high returns without risk. If it seems too good to be true, it probably is.

Incalculable Transparency

Ponzi schemes usually operate with no full forthcoming explanation of how the investment would operate. The organizer may refuse to adequately answer questions regarding where the money may go and how it is going to be invested. Insufficient information or descriptions that are too vague are other red flags.

Pressure to Invest Rapidly

Scammers often create a sense of speed, telling potential investors that they need to invest fast, as they might lose the opportunity. Also, providing limited-time bonuses or other incentives is yet another trick to push investors into a course of action without taking the time to carefully evaluate the offer.

Management Makes Assured Returns on Principal No Matter Which Direction the Market Takes

Real investments are watered down by current economic issues when market conditions vary, causing returns to fluctuate. Whereas if an investment offers constant returns no matter what happens in the market, it could signify a Ponzi scheme.

Problems with Withdrawal

Delay or refusal of withdrawals become instant warning signs. The schemers usually take advantage of such situations to prolong the scheme.

Complicated Structures

The convoluted or confusing structure of the scheme is one of the best indicators of it being a Ponzi scam. If an investment is explained in a torturous way, there are clear grounds for raising an eyebrow.

How to Avoid Ponzi Schemes?

During an investment decision-making process, keep your eyes wide open and fresh. Here are a few pointers to protect yourself:

Researching Everything

Before deciding on an investment, it’s best to do your research about the company, its performance history, and its business model. If applicable in your country, check whether the company is registered with its national financial authorities or the SEC.

Consultation with a Professional

If you want to determine whether the opportunity you are considering is a legitimate one, get in touch with a financial advisor. Only then will they guide and inform you well in deciding.

Understanding an Investment

Be sure you know precisely where your cash is going, and how it will turn a profit. If it sounds completely outlandish or horrendously complicated — a big warning sign that it’s probably a Ponzi scam.

Be Wary of High-Pressure Sales

Avoid any high-pressure salesperson insisting that you invest or discouraging too many questions. Good investments are always going to give you breathing room to contemplate and assess before proceeding with a decision.

Know the Risks

There is no investment without risk. Be highly suspicious of any investment that promises guaranteed returns; that is the general hallmark of Ponzi schemes. A good investment should clearly state the risks and possible returns.

Chronicles of Prominent Ponzi Schemes in History

The most famous Ponzi scheme was executed by Bernie Madoff, who administered a vast Ponzi scheme worth an estimated $65 billion. Madoff’s scheme lasted decades, fueled by his never-ending search for fresh investors and the promise of naïvely unattainable dividends. Madoff himself was arrested in 2008, which marked the end of the Ponzi scheme, and many investors went bust, and he was sentenced to 150 years in prison for his transgressions.

Other remarkable Ponzi schemes:

Allen Stanford’s Ponzi Scheme

Stanford was a man who ran a Ponzi scheme worth $7 billion under the guise of selling high-yield certificates of deposit. He was arrested in 2009 and sentenced to one hundred and ten years in jail.

Zeek Rewards Scam

Around six hundred million dollars worth of money was stolen from the investors in this Ponzi scheme. It was touted as a bona fide penny auction site and investment opportunity.

Ponzi schemes manifest one of the dirtiest forms of financial fraud, with very scary consequences for investors. These schemes create a false impression of profiting for a very short period; however, in the long run, they will collapse. Be careful and attentive to the signs of this fraud. You need to do your homework and take professional advice. If the opportunity you see sounds too good to be true, then it probably is. If you’re careful and well-informed, you’ll shield yourself from a vicious Ponzi scheme.