How to detect if a crypto project is based on a Ponzi scheme.

Over the past few years, the number of so-called Ponzi schemes in the cryptocurrency markets has increased. Here’s how to spot them.

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In the world of cryptocurrencies, the number of Ponzi schemes has begun to increase since 2016, when the market started booming. A number of investment schemes have taken advantage of this fact to deceive gullible investors.


The number of Ponzi schemes in this sector grew primarily due to decentralized blockchain technology, which allows fraudsters to avoid centralized monetary authorities. Under normal circumstances, these would be reported or frozen. 

Fraudsters are also encouraged by the fact that blockchain systems are immutable and transfers of funds are irreversible. This makes it more difficult for victims of Ponzi scams to get their money back.


In an interview with Cointelegraph, KuCoin exchange CEO Johnny Lyu said that the crypto sector is a very fertile ground for these types of schemes. Mostly for one reason:

"The sector is full of eager users who want to invest their money, and there is virtually no legal regulation to prevent projects from hiding their nefarious intentions." "Unless there are clear and internationally recognized financial regulations for the cryptocurrency industry, we will continue to see the proliferation of new Ponzi schemes and their collapses," he added.  

How Ponzi schemes work

The technical term "Ponzi scheme" began to emerge in the 1920s. The fraudster Charles Ponzi offered investors a highly profitable product that allegedly used postal orders to make impressive profits.

He promised them a return of up to 50% within 45 days or 100% interest within 90 days. He kept his word, and the first group received the returns he claimed. What the investors did not know was that the money they received was actually from other people. This cycle was designed to lure new investors. As a result, Ponzi misappropriated more than $20,000,000.

He was not the first person to use such a scheme to commit fraud. But he was the only one to use it on such a large scale, which is why it is now named after him.

A Ponzi scheme is a fake investment scheme that promises astronomical profits to clients. The money collected from new investors is used to pay off previous investors. This helps the scammers maintain their apparent credibility and thus attract new investors.

Ponzi schemes require a constant flow of money to be sustainable in the long run. This trick usually stops working the moment the number of new entrants drops or when investors decide to collect their money in bulk.

How to spot a Ponzi scheme in crypto?

Over the past few years, there has been a significant increase in Ponzi schemes due to the booming cryptocurrency market. So, nowadays, it is important to know about the existence of these schemes and recognize them. 

Before entering into any crypto project, it is important to pay attention to some of the following aspects.

Ridiculously high returns

Many crypto Ponzi schemes claim to reward investors with high returns with little risk. However, this is contrary to how investing works in the real world. From this point of view, every investment involves some level of risk.

Typical crypto investments fluctuate according to prevailing market conditions, so such claims should be seen as a warning signal. In most cases, investors will never get a penny of their money.

Khaleelulla Baig, founder and CEO of KoinBasket (a crypto trading platform), stated for the Cointelegraph server that transparency should be the number one factor to consider before investing money in a crypto project:

"Project transparency matters a lot. Most build their businesses on fairy tales and promises. Check and see how the team has performed against their past commitments."

He also advised investors to avoid projects with unclear fundamentals based on a number of external influences.

Unregistered investment projects

Before investing money, it is important to check whether the company is registered with regulatory organizations such as the United States Securities and Exchange Commission (SEC). Registered cryptocurrency companies must submit details of their revenue to the relevant authorities to avoid fines. Therefore, they are unlikely to be involved in Ponzi schemes.

Dangerous projects are registered in jurisdictions with lax crypto regulation and exhibit the characteristics of this system.

Some jurisdictions (e.g., the European Union) have enacted elaborate laws to specifically protect investors. Recently, the European Council approved a proposal that will require cryptocurrency companies to comply with the Markets in Crypto Assets (MiCA) rules. At the same time, they will be required to be licensed to operate in the region.

When crypto companies are subject to MiCA, they will reveal their revenue models. This will mitigate the rise of crypto businesses that rely on Ponzi-like principles.

Application of sophisticated investment strategies

Ponzi schemes are able to achieve high returns with minimal risk based on "sophisticated trading strategies." However, the description of many of them is difficult to understand. This is often intentional in order to be uncontrollable.

This tactic was used to deceive investors by Bitconnect, whose fraud was exposed in 2016. Its operators encouraged investors to buy BCC coins and lock them on the platform. By doing so, they would allegedly allow their "sophisticated" software to trade funds. The platform claimed to provide monthly interest with a return of up to 120 percent per annum.

Ethereum co-founder Vitalik Buterin was one of the first to call attention to this suspicious project. US and UK authorities shut the system down and declared it a Ponzi scheme. Its termination in 2018 triggered a drop in the price of BCC, leading to losses of billions of USD.

High centralisation

These projects are typically run on centralized platforms. Take, for example, OneCoin. This pyramid scheme, which operated between 2014 and 2019, deprived investors of approximately USD 5 000 000 000. The entire scam was based on its own internal servers and was not connected to the blockchain system.

Subsequently, OneCoins could only be traded on the OneCoin Exchange, which was their own marketplace. The tokens could be exchanged for cash, with fund transfers being made through banks.

OneCoin also had daily withdrawal limits that prevented investors from withdrawing all funds at once. 

The system was shut down in 2019 following the arrests of some key members. A federal arrest warrant has been issued for OneCoin founder Ruya Ignatova, who remains at large.

Multi-level marketing

KuCoin CEO Johnny Lyu noted in an interview with Cointelegraph about Ponzi schemes in the cryptocurrency market that not much has changed over the years and that multi-level marketing (MLM) is still at the core of many Ponzi schemes:

All these complex schemes involve multiple levels of users. Referral programs, percentages and other gimmicks are the hallmarks of a Ponzi scheme. The higher levels are fed by funds put in by the lower levels without actually doing any business.

Multi-level marketing is a technique where subscribers generate revenue by selling certain products and services and recruiting others to build their own network. Higher-level members also get a portion of the commission from the newcomers’ sales.

One ponzi scheme that recently made the headlines was run by GainBitcoin.

The pyramid scheme led by Amit Bhardwaj had seven main recruiters based in India and on various continents around the world. Their job was to recruit investors into their network.

The scheme guaranteed users 10% monthly returns on their bitcoin (BTC) deposits for a period of 18 months. The system reportedly collected between 385,000 and 600,000 BTC from investors.

Ponzi schemes have already been used by fraudsters for over a century. Since the cryptocurrency world is highly susceptible to these types of schemes, it is important to be very cautious before investing in any new project.

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