Cryptopedia

What Are Ponzi Schemes?

In this post, we will discuss all the information you should have about Ponzi schemes. We will share with you what they are, how to avoid them and how they are staling users’ funds. 

What are Ponzi Schemes?

Ponzi scheme is the name given to a kind of fraud that uses new investors’ money to pay profits to new investors. For example, a crypto company may be promoting a token that promises profits to users that buy this asset. 

Once the users purchase the asset, they will start receiving funds. Thus, everything seems normal and even very positive. The profits are very high and the experience is very smooth. In general, there is going to be a lot of promotion on social media of this project. This would make investors believe the crypto company is growing and doing a good job.

Despite that, the profits paid to the first investors are going to be paid with the funds deposited by newer investors. As long as new investors place their funds into this company, the profits can be paid and the illusion of success can continue. 

The users of these platforms and crypto projects believe that they are earning legitimate funds from business operations. However, all of the funds (or most of them), are going to come from new investors. If older investors claim all of their funds, the Ponzi scheme may not last for a long period of time. 

The owner of the Ponzi scheme is going to be sharing with investors regular reports of their funds and profits. They will also be pushing investors to “re-invest” their funds rather than cashing them out. 

How to Spot Ponzi Schemes?

There are some red flags that would allow us to understand whether a project could be a Ponzi scheme. In this section, we are going to share these red flags with you:

• Large (sometimes unbelievable) Profits – If you are promised to get massively large profits (“Get 500% profit on your investments in 5 days!)
• Not regulated companies – if the company does not have a regulatory license in some of the most regulated countries, this should be considered a red flag
• They push you to re-invest your funds – they push you to re-invest your funds even when you want to cash out
• Issues trying to cash out – if you are finding issues to cash out, then you should be concerned about it
• Lack of basic information – some Ponzi schemes are created in just a few days. If you have been denied basic information, then this should be considered a red flag
• Complex and sometimes not logical investment strategies – Ponzi schemes will be using complicated terminology or complex investment strategies. If you find they are offering investment strategies that do not seem logical, then ask more questions and ask for further information.