Since the launch of Bitcoin (BTC) in 2009, cryptocurrencies have grown considerably and been adopted by the masses. However, the rise of digital assets has led to various scams, including Ponzi and pyramid schemes.
The simple goal of these scams is to defraud you and other unsuspecting crypto investors. So what are crypto Ponzi and pyramid scams, and how can you avoid them?
Understanding Ponzi and Pyramid Schemes in the Crypto Industry
Crypto Ponzi and pyramid schemes involve malicious actors enticing and defrauding unsuspecting investors looking to earn profits. Despite their varying modus operandi, both scams promise massive earnings from supposed legitimate financial operations but participating investors typically end up with huge losses.
What Is a Crypto Ponzi Scheme?
In crypto Ponzi schemes, malicious actors canvass new investors, promising them massive returns on investment (ROIs). These fraudsters tout diverse investment plans such as staking, automated crypto trading, or crypto arbitrage trading but actually pay early investors using funds from new investors.
A crypto Ponzi scheme organizer can invite investors to buy a new token, say “XYZ”, or to lend their existing tokens, maybe BTC. These fraudulent organizers would likely promise a massive interest rate, claiming they would generate income as they invest or commit your assets. They usually capitalize on current trends, so if cryptocurrency staking is trending, they’d promise to stake your assets particularly lucratively.
If you invest early, you might be paid and consider the scheme legit. This is all a ploy to build hype for the scam. Typically, most participants would join later, investing their assets and hoping for massive gains. But after considerable asset commitments, the schemers would withdraw all the crypto assets and abscond.
Ponzi schemes could also collapse if there’s a lack of new investors. Because there’s no inflow, there’ll be no way to generate returns for investors. At this point, the schemers would take what’s available and bolt.
Example of Crypto Ponzi Schemes
The term “Ponzi schemes” was developed due to Charles Ponzi, who promised investors a 50 percent ROI for a purported international mail coupons investment. Ponzi paid the earlier investors using funds from newer investors and fled after gathering a satisfactory amount of money.
Similarly, in 2013, Trendon T. Shavers and his firm, Bitcoin Savings and Trust (BTCST), promised investors a weekly interest of about 7 percent based on Bitcoin market arbitrage trading. However, BTCST was not selling or buying Bitcoin. After charging Shavers and his firm, the Securities and Exchange Commission (SEC) reported that he made a net profit of over $164,000.
Since then, several crypto Ponzi schemes have been exposed, including Bitconnect, Regalcoin, and Mining Max. These schemes have appeared in various forms—fake crypto trading platforms, staking services, lending solutions, cloud mining services, and trading bots. Ultimately, they led to the loss of investor funds.
What Is a Crypto Pyramid Scheme?
A crypto pyramid scheme involves the initial scammer recruiting other investors who are to recruit more investors, and so on and so on. At first sight, this scheme appears like a Multi-Level Marketing (MLM) campaign, in which sales are driven through a network of people, groups, and businesses. However, unlike MLM, crypto pyramid schemes do not offer legitimate products.
Like crypto Ponzi schemes, those at the top of the pyramid earn more money, and those at the bottom lose money. If crypto investors invite more participants, they may earn more as the money goes from the bottom to the top.
In crypto Ponzi schemes, fraudsters present an investment opportunity, like the right to buy a digital asset and sell it at a higher price. And each investor is to pay their recruiter for a chance to earn this right. Then, the recruiter will pay a certain portion of the fee to those at higher levels of the pyramid.
Examples of Crypocurrency Pyramid Schemes
In December 2022, the Department of Justice announced that Karl Greenwood, a co-founder of OneCoin, had pled guilty to fraud and money laundering charges after offering a billion-dollar cryptocurrency pyramid scheme. Greenwood and Ruja Ignatova launched OneCoin in 2014, offering ONECOIN, a fraudulent crypto asset, through a global MLM network.
The fraudsters claimed the fake token would be the next big thing, probably nixing Bitcoin. And this led to numerous investors recruiting more and more participants until over $4 billion had been invested. Greenwood and Ignatova manipulated the fake token price on the fake crypto exchange from €0.5 to over €29, enticing unsuspecting investors until 2017.
10 Common Signs of Crypto Ponzi and Pyramid Schemes
While crypto Ponzi schemes require investments in digital assets, crypto pyramid schemes require you to pay a fee, purchase digital assets, and recruit other investors. Here are other signs of Ponzi and pyramid schemes in the crypto industry:
- Despite the volatile crypto market, these scams usually promise extremely high and consistent ROIs.
- Sometimes, crypto Ponzi and pyramid schemes claim to pose little to no risk to investors.
- If the team members in a crypto project are anonymous, it could be a scam project.
- When crypto firms employ massive, elaborate, and flashy marketing campaigns, they are likely promoting a scam project.
- Crypto Ponzi and pyramid scams are largely offered by unlicensed, unregistered, and unregulated firms.
- Usually, firms that offer these schemes have complex fees, commissions, and investment structures.
- These organizations also have limited or no documentation—no whitepapers or roadmaps.
- Another common sign is that there are no investment requirements; everyone is usually allowed to invest and earn in crypto Ponzi and pyramid schemes.
- If you have invested in a scam project, you might notice that you can’t cash out your investments or that the organizers keep suggesting you roll over your investments.
- You might also notice errors in account statements or payment calculations when reviewing investment documents.
How to Avoid Crypto Ponzi and Pyramid Schemes
Despite the rising prominence of crypto Ponzi and pyramid schemes, they continue to grow. It’s your responsibility to protect yourself from these scams. These are a few steps you can employ to avoid falling victim:
- Before investing in any crypto investment, do your own research. Review whitepapers, verified news sources, investor assessments, and project affiliations.
- Ensure accountability by confirming the face or team behind every crypto project before getting involved. You can also check the public sentiment surrounding the team—if it is favorable.
- Look out for licenses, certifications, and affiliations. Ascertain that every crypto organization you deal with complies with the relevant regulatory guidelines. If it’s a decentralized finance (DeFi) project, check independent audits and other relevant certifications.
- Don’t be swayed by promises of massive returns. The crypto market remains volatile, and every investment carries some risk.
- Be alert if you find out about a crypto project through unsolicited offers and messages. It could mean the organization has employed massive marketing campaigns to lure unsuspecting investors.
- Don’t ever invest more than you can bear to lose. Every wise crypto investor has an investment strategy. Do not invest more because of “sure” promises of yields.
What to Do After Falling Victim to Crypto Ponzi and Pyramid Schemes
If you’re lucky, you can withdraw some of your investment before the scheme unravels. After regaining your assets, or even if you can’t regain them, you should report the scam to your local enforcement agencies, state securities regulator, the SEC, Financial Industry Regulatory Authority (FINRA), or the Federal Trade Commission (FTC).
You can also educate other investors on crypto Ponzi and pyramid schemes, so extraordinary fake returns do not mislead them.
