Ponzi schemes in crypto

The understanding of Ponzi schemes, which are getting more sophisticated, will help to keep your funds safe.

A Ponzi scheme is a very old type of fraud in which the influx of money from newcomers pays off earlier investors. Thus it works in circles, passing money from one participant to another. The scam is named after Charles Ponzi, who carried out his fraud in the 1920s, promising investors 40% returns in three months and stealing about $20 mln from 30,000 scheme participants, which is equivalent to $207 mln today.

The main lure of this type of fraud, just like many others, is typically the promise of huge profits. Meanwhile, the fraudsters only create the appearance of profitability as long as the flow of new investors continues. But as soon as it stops or investors decide to withdraw their money, the scheme collapses, and most participants are left with nothing.

Since potential investors are more likely to be interested in cutting-edge technologies, Ponzi scheme creators always follow trends across all industries. The growth of the crypto market makes it attractive to both investors and those who want to use it for malicious purposes.

What do Ponzi scheme scenarios look like?

Ponzi schemes always look pretty much the same. An attractive offer promises high yields with minimal risks, often accompanied by bonuses for referring new investors. The first investors usually make some kind of profit, unlike those who join shortly before the scheme crashes. Ponzi and pyramid schemes have much in common, except that the latter only focuses on a recruiting mechanism for new participants, usually involving multi-level marketing (MLM). In this case, each participant acts as a promoter when recruiting a certain number of new members who pay a fee to join the scheme. The new participants’ fees pay off the earlier ones. The pyramid scheme relies solely on the recruitment tree, not offering other investment opportunities.

While Ponzi schemes can also harness the MLM principle, the main difference is that they always involve an investment offer. It typically includes automated crypto trading, lending some tokens or purchasing a new “promising” token, which makes the fraud scheme more complex and challenging to spot. Allegedly “unique” opportunities to generate massive crypto profits within a short timeframe have been the lure in most scams whose organizers have been indicted over the past year.

Trade Coin Club

According to the Securities and Exchange Commission’s (SEC) complaint, investors of Trade Coin Club were attracted by false claims of profit of 0.35% per day by investing in a trading bot. Their funds were used for organizers’ personal purposes and for paying a global network of promoters who engaged new investors. Meanwhile, Trade Coin Club raised over 82,000 BTC (the equivalent of $295 mln at the time of operation).

BitConnect

According to the United States Department of Justice website, another global Ponzi scheme raised about $2.4 bln by promising a lucrative lending program to earn on trading technology. Volatility trading was supposed to be powered by “BitConnect Trading Bot” and “Volatility Software.” However, BitConnect just paid later investors’ money to earlier investors, and the lending program was abruptly shut down after one year.

GainBitcoin

One of the most notorious fraud schemes that ran in India in 2022, GainBitcoin, involved multi-level marketing, which appears to be a scammer’s favorite since it allows for faster investor expansion with the promise of rewards for attracting new investors. According to India Today, major recruiters in different parts of the world lured investors into a scheme that guaranteed a monthly return of 10% on an 18-month BTC deposit.

The founders of this Ponzi scheme even paid investors the principal and interest, though not in BTC, but rather in the MCAP token they established, whose value did not match the investments in BTC.

One Coin

In late 2022, according to the U.S. Department of Justice website, one of OneCoin’s co-founders, Karl Sebastian Greenwood, pled guilty (the indictment was filed back in 2018) to fraud charges. Thus, the story of the famous crypto Ponzi scheme, operating from 2014 to 2017, was revisited. Through a global MLM network, investors were offered the fraudulent OneCoin token, which was supposed to be mined on a non-existent private blockchain. At the same time, the token’s price was manipulated on a fake crypto exchange. The scammers raised about $ 5 bln. It would seem that such fraud was only possible in the early days of crypto adoption when it was not yet obvious to investors that blockchain should be decentralized and transparent, and too much centralization of the project carries certain risks. Still, similar schemes continue to operate.

Icom Tech and Forcount

The more recent examples are IcomTech (active in 2018) and Forcount (active between 2017 and 2021), whose founders and promoters faced charges of conspiracy to commit fraud. According to the U.S. Department of Justice website, both companies promised high yields in exchange for purchasing fraudulent investment products. They offered profit guarantees in six months from crypto trading and mining, even though none of the companies had anything to do with those activities, while the founders and promoters used fresh investor funds to pay earlier investors.

FTX

The collapse of the сentralized exchange FTX appeared to be one of the most widely discussed events of 2022 in the crypto space. Its founder, Samuel Bankman-Fried, was charged by the SEC with orchestrating a scheme to defraud investors. The lawsuit also included allegations of using a Ponzi scheme. Though it is still early to say whether this was the case until all the circumstances are figured out, some Ponzi-like elements may be noticeable. SEC’s complaint alleges that Bankman-Fried failed to disclose to FTX investors the transfer of customer funds to Alameda Research LLC, FTX’s private hedge fund for cryptocurrencies, providing Alameda with a virtually unlimited “line of credit.”

When FTX investors massively withdrew their funds, demanding loan repayment, rates were doubled to attract additional investment, which continued until an $8 bln financial hole was created and the company crashed.

How to recognize a Ponzi scheme?

Here are some red flags that signal a possible Ponzi scheme:

• Promises of massive returns on investment (ROIs);
• Lack of a clear and transparent investment strategy, which is typically kept “confidential”;
• A too complex payment strategy – never invest in something you don’t understand;
• A promise of high investment returns with minimal risk – investments with higher returns usually involve more risk;
• Overly stable returns – as market conditions tend to change, returns based on specific investment opportunities can rise and fall over time;
• Difficulties in receiving payments. Ponzi scheme organizers often postpone promised payments by offering higher investment returns.