FTX is no more, TerraUSD is history and over $6 billion has been lost in the Squid Game rug pull. All this in 2022. The risk of Ponzi schemes has increased manifold in the last few years. With the mainstreaming of cryptocurrencies, telling if your crypto investment is a Ponzi scheme has become even more difficult. As more and more new investors jump on the crypto bandwagon, learning how to smell a Ponzi scheme from a distance is a must to navigate through the choppy crypto market.
What Is A Crypto Ponzi Scheme
One can take events like the Terra-Luna crash as a case study to assess the harm that a crypto Ponzi scheme can cause. A crypto Ponzi scheme is where a project is promoted excessively to lure a significant number of investors. In the end, initial investors make money while later investors lose every single penny in pursuit of exponential gains. Take the example of the Squid Game token, which dropped nearly 100% within seconds, after zooming over 2,400% within 24 hours. In the majority of the cases, the people behind the project present a bogus idea as a long-term investment only to disappear with investors’ money.
Since the majority of users jump on the crypto bandwagon in search of exponential profits, the industry is a prime target for those running Ponzi schemes. Since the crypto industry is largely unregulated, it is extremely difficult to reach the source of the scheme to find the real culprits. Unlike traditional investment, there is a dearth of third-party audit reports for many emerging crypto projects. In such an unregulated and decentralized space, ascertaining if your crypto investment is a Ponzi scheme becomes an uphill task.
How Do Crypto Ponzi Schemes Work
The origin of the term ‘Ponzi Scheme’ traces back to 1920, when a swindler named Charles Ponzi marketed a high-returns program to steal more than $20 million. Charles lured investors by promising up to 50% returns within 45 days or 100% interest within 90 days. In fact, the first group of investors even got the returns as promised. However, the money they received was from later investors. This is the rough idea of how a Ponzi scheme works.
To sum up, a Ponzi scheme is where an initial set of investors are provided with the promised returns/benefits and the minds behind the scheme excessively promote those returns to lure a wider set of investors and steal their money.
Biggest Crypto Ponzi Schemes
When a Ponzi project presents itself as a legitimate crypto project, it is easy for investors to fall prey to it and end up losing money. In a market where you are thinking about making money every second, a lot can go wrong. It has happened so many times and here are some of the most infamous ones.
Bitconnect Scam: Bitconnect was launched in 2016, disguised as a Bitcoin lending solution promising 40% monthly returns. The first red flag was unknown developers, headed by an individual named Satao Nakamoto. The scheme required investors to purchase BCC tokens and lock them on the platform. Notable personalities like Vitalik Buterin and Charlie Lee criticised the project and it was eventually declared a Ponzi by the US authorities in 2018. This resulted in BCC crashing 90% and investors losing over $3.5 billion.
Onecoin: Next we have the longest-running crypto Ponzi scheme. The scam went on for five years between 2014 and 2019 and Bulgarian fraudster Ruja Ignatova was behind it. Ruja marketed Onecoin as a “Bitcoin killer” and he was somewhat successful in his pursuit given that investors lost more than $5.8 billion. Shockingly, Onecoin had no blockchain of its own. So investors were effectively holding dust in name of Onecoin. Eventually, the US government cracked down on the project and the person behind it.
PlusToken: PlusToken is among the largest Ponzi schemes in the history of crypto. Chinese messaging app WeChat was at the heart of the majority of marketing for the project. The runners of the Ponzi scheme lured investors by promising 10% to 30% monthly returns. As a result, over 3 million investors across China, Japan, and South Korea invested in the project and bought the PulsToken. To make it sound legitimate, those behind the scheme modelled the entire project around crypto literacy and wallet service. After selling false hopes to investors for over a year, the PlusToken exited the scene with $3 billion worth of cryptocurrencies in hand.
Squid Game Scam: Probably the most infamous crypto Ponzi scheme, the altcoin inspired by the popular South Korean TV show ‘Squid Game’ went from riches to rags in less than two weeks after its launch. The Squid Game scam is the reason many new crypto investors came to know about the concept of rug pull. But not before losing over $6 billion to the Ponzi. The token’s price dropped nearly 100% within seconds, taking the crypto world by storm.
Now that we have understood how a cryptocurrency Ponzi scheme works, let us understand how to spot one.
How To Identify A Crypto Ponzi Scheme
To begin with, you must do your due diligence before investing in any cryptocurrency, irrespective of the hype and marketing. While assessing a project, look for the following red flags, besides digging the whitepaper, website, and community:
Promise Of High Returns: What is the common factor unifying all the aforementioned Ponzi schemes? They all offer unrealistic returns in a short time period, with little or no risk. If the project you are researching falls in the same category, keep your distance. Remember, money travels from weak hands to strong hands.
Lack of Liquidity: Unlike other assets (real estate), cryptocurrencies are very liquid. If the project you are assessing is illiquid, you must dig in deeper to understand whether the investment will be available for liquidation.
Secretive Strategy: When a project is able to provide promised returns through a secretive strategy, there could be something fishy. Proceed with caution while dealing with projects that are yet to disclose their team, whitepaper, tokenomics, etc. Transparency is the way forward.
Now that we have discussed the red flags, it all boils down to the final question:
Is Bitcoin a Ponzi
Ascertaining if bitcoin is a Ponzi scheme is a decision that lies with the individual. It all depends on how you perceive cryptocurrencies. But from a neural perspective, you can use the red flags above as checkboxes. Is Bitcoin secretive? BTC is largely decentralized and transparent as its whitepaper is accessible to anyone. It does not offer unrealistic gains in a shorter span of time and most importantly, the use cases and utilities are well-defined. BTC is clearly unlike any of the aforementioned projects. So it all boils down to your approach.