One in every 10 adults in the US falls victim to fraud or scam every year, according to a study published by the Stanford Center on Longevity. In 2019, Chainalysis’ 2020 Crypto Crime Report revealed that almost $4.30 billion worth of cryptocurrency was bagged by fraudsters from millions of people across the globe. Interestingly, 92% of this amount came from Bitcoin Ponzi schemes.

So, is Bitcoin a Ponzi scheme? What is a Ponzi scheme and why do a lot of people fall prey to it? Let’s break down everything you need to know about it and learn how to dodge every possible attack in the crypto sphere.

What is a Ponzi scheme?

A Ponzi scheme is a type of investment fraud that aims to attract and recruit many clients to make investments. Let’s have a blast from the past to get to know the man behind this scheme and how he executed it.

Charles Ponzi: The mind behind the notorious investment fraud

Charles Ponzi

“Ponzi scheme” was coined after the man who carried out a massive fraud in the 1920s. This confidence trickster named Charles Ponzi promised his clients a 50% profit within 45 days or 100% outrageous returns in three months by buying discounted International Reply Coupons (IRC) abroad and selling them at the current market price in the US.

To make his investment scheme look legitimate, he paid earlier investors using the investments made by the later investors—in other words, these people weren’t really earning actual profits from Ponzi’s business operations. However, there wasn’t anything sketchy about the scheme at first because every investor was able to receive convincing amounts of profit from Ponzi.

He was able to deceive lots of people for over a year before the scheme was revealed, costing Ponzi’s “investors” $20 million. Interestingly, Ponzi wasn’t the one who invented this type of investment fraud—it’s been around since the 1830s. But because of successfully orchestrating the massive illegal investment operations, the scheme became closely identified with him—hence the term.

How do Ponzi schemes work in the crypto world?

In Ponzi schemes, scammers come up with a business plan that generates income by attracting investors. This type of scheme requires a consistent flow of money to survive, so to keep the operations up and running, fraudsters use the funds they get from new investors to pay out their old investors. By doing this, investors are lured by the idea that they’re making profits from the business they funded. But in reality, they’re just throwing their money away.

The days of constant and huge profits will end as soon as fraudsters struggle to recruit more investors in the business and convince them to cash out. This scheme is present in different industries and businesses today, and the same strategies apply to deceive people in the crypto world.

Cryptocurrencies and Ponzi schemes

YouGov’s research showed that about 81% or eight in 10 Americans are familiar with at least one type of cryptocurrency and BTC ranks as the most popular among all. Almost 18% of all Americans purchased crypto in 2019 and 35% of them are millennials. Today, popular businesses have also started accepting crypto payments, which adds to the growing adoption of this digital innovation.

These pieces of data prove that the number of crypto users worldwide is growing exponentially—no wonder why fraudsters are targeting this expanding industry, especially today’s most dominant cryptocurrency. Bitcoin’s decentralized, volatile, and other valuable features make it an ideal asset for market investors. However, fraudsters also know about the beauty of Bitcoin. That’s why they’re trying to take advantage of it but in an entirely different way.

But the good news is this: there’s a lot of ways to detect such frauds.

How can I spot a Bitcoin Ponzi scheme?

Detecting cryptocurrency Ponzi schemes can be tricky, but it isn’t impossible. To help you recognize such frauds, here are seven common red flags you need to look out for in an investment opportunity.

1. Investments with little to no risk

It’s important to know that investments come with a set of risks. As investors often say, “The higher the risk, the higher the reward.” But scammers can promise you high investment returns with little to no risk. So if you’re offered a similar proposal that sounds too good to be true, it’s possible that you’re being recruited to a Ponzi scheme.

2. Overly consistent returns

Market movements are unpredictable and this is why investment returns aren’t always consistent. Bitcoin’s price can either go up or down, so be careful with investments that make consistent returns despite unstable market conditions.

3. Unregulated businesses or firms

Fraudsters often run investments that aren’t registered in the Securities and Exchange Commission (SEC). This allows them to fly under the radar and confidently carry out their malicious intentions.

4. Unlicensed individuals

Investment professionals are required by federal and state securities laws to be licensed. However, most crypto Ponzi schemes involve individuals running investment operations and giving investment advice without a license.

5. Business strategies that are secretive and hard to understand

Investing can be thrilling, especially with cryptocurrencies. But if the investment sounds like rocket science and the advisor or recruiter can’t explain the business to you well enough, then maybe it’s time to look for other opportunities.

6. Problems with documents

Be wary of excuses about having issues with paperwork. In some cryptocurrency Ponzi schemes, investors receive excuses when they ask for the information in writing. Read all details carefully and be on the lookout for possible mistakes in account statements. While it’s not always the case, errors may be a sign of fraudulent activity.

7. Issues with receiving payments

Be skeptical if you’re having trouble cashing out your crypto investment funds or if you didn’t receive a payment. Some fraudsters often convince their victims to “rollover” or delay the payments, with a promise of even higher investment returns.

How can I protect myself from crypto Ponzi schemes?

Bitcoin pyramid schemes, exit scams, and other forms of fraud are prevalent, but you can always steer away from such attacks. Here are some of the things you can do:

1. Familiarize yourself with the ins and outs of Bitcoin

If you’re new to the crypto world, be sure to do your research to learn what Bitcoin is and how it works before you jump into an investment. As a rule of thumb, don’t invest in something you don’t clearly understand.

2. Check the credibility of crypto investment firms

As we mentioned earlier, Bitcoin Ponzi schemes often involve unregistered firms and advisors. Before bringing in amounts of your money for investment, don’t forget to check the individual or company’s reputation. Remember, this involves your hard-earned money, so you better make sure that they will be in the right hands.

3. Seek help from a professional

You can always seek assistance from investment managers or lawyers you know and trust if an opportunity from unfamiliar people knocks on your door. This can help you in deciding whether you should push through with the crypto investment or not.

What should I do if I fall victim to a Ponzi scheme?

This is one of the fraudulent activities people are most likely to fall for. So if you think you’ve fallen to it, reach out to investment fraud lawyers, the SEC, Financial Industry Regulatory Authority (FINRA), or your state securities regulator to report the incident right away and get the help you need.

Don’t let your guard down!

Let’s be honest—everyone wants easy money. That’s why a lot of people still fall and get trapped in cryptocurrency pyramid schemes and other kinds of fraud. Many people are still lured by fake promises from “get rich quick” schemes. So don’t let yourself be fooled by these confidence tricksters!

Paxful is doing our part in fighting fraud and educating people about the ins and outs of crypto. Do your part and keep our learnings from earlier, educate yourself about Bitcoin investment and how it works, think twice or even thrice when making decisions, and never let your guard down against digital threats.

*Disclaimer: The content of this article is for informational purposes only. The opinions expressed here are not meant to be taken as financial, investment, or any other advice, nor do they express the opinion of Paxful.