Cryptocurrency has seen an explosion of growth in the last few years which has attracted interest among beginner and seasoned investors alike. However, this has gained the attention of scammers looking to exploit investors through a number of cleverly constructed scams and schemes.
Ponzi schemes have been around for over a century, and they have made their way to the cryptocurrency market. This guide will cover what a Ponzi scheme is, well-known examples of cryptocurrency Ponzi schemes, and how to identify them.
What is a Ponzi scheme?
A Ponzi scheme is a type of investment scam that promises high returns with little or no risk. The scammers running the scheme use money from new investors to provide a ‘return’ to earlier investors, giving the appearance of profitability and legitimacy.
However, the Ponzi scheme is not actually generating any profits or doesn’t have any underlying cash flows, and eventually, it will collapse when there is not enough new money coming in.
Ponzi schemes have been around for well over a century, but their name comes from Charles Ponzi, a con artist arrested in 1920. Ponzi didn’t invent the scam itself, but he was the first figure to rise to notoriety with it. His con involved a (false) claim that postal reply coupons could be exchanged in certain countries for more money than originally purchased for.
What is a crypto Ponzi scheme?
Ponzi schemes in crypto have all the characteristics of a traditional Ponzi scheme but with crypto assets instead of fiat currency. Con artists create fake crypto businesses and deceive investors with a variety of lies and phony statistics.
Unfortunately, a lack of understanding of cryptocurrency and the digital currency system can make many investors susceptible to such Ponzi schemes. Cryptocurrency itself is a complex subject, which can lend itself to the standard Ponzi scheme lie: “the investment model is too complex to explain”.
Examples of crypto Ponzi schemes
In cryptocurrency’s short history, there have been numerous Ponzi schemes – especially in its earlier years when cryptocurrency was less regulated.
In the past few years, greater security measures and new regulations have dramatically improved the safety of cryptocurrency, but it’s still important to be diligent.
We’ve highlighted three of the most notorious crypto Ponzi schemes below.
Quadriga was a Ponzi scheme that only revealed its true nature upon its founder’s death.
Unlike many other scams, Quadriga wasn’t a currency but an exchange: QuadrigaCX. Gerald Cotton was the founder of Canadian cryptocurrency exchange, Quadriga. He was the only person with full access to the wallets that held clients’ crypto assets.
In December 2018, Cotton died suddenly while travelling in India due to complications with Crohn’s disease. This left $215 million USD worth of cryptocurrency stranded and inaccessible.
The way the scheme worked was that Cotton used clients’ crypto assets to trade on other exchanges. The profits were then moved into a personal account, rather than being distributed back to clients.
This was only uncovered after Cotton’s death when his widow tried to access the cold wallets and found they had been emptied.
Did You Know?
The story behind Gerlad Cotton and the QuadrigaCX scam has been made into a popular Netflix documentary titled ‘Trust No One: The Hunt for the Crypto King’.
BitConnect was a cryptocurrency Ponzi scheme that was active from 2016 to 2018. The scheme was a high-yield investment program that promised investors 1% daily compounded interest, which is impossibly high.
The concept of BitConnect was that users would send their Bitcoin (BTC) to the platform, and automated trading bots would then be used to make investments that would guarantee users huge returns.
BCC, BitConnect’s digital token, was what powered the platform. At one point, BCC held a spot in the top twenty coins by market cap globally. Despite this, users loaned the platform Bitcoin to make trades, not the native token.
On top of this, the founder of BitConnect was anonymous, which was also a cause for concern. This is not the first instance of anonymity behind a cryptocurrency – Bitcoin’s own founder uses a pseudonym. However, when coupled with a return guarantee and lack of whitepaper, this was incredibly suspicious.
It was Ethereum’s co-founder, Vitalik Buterin, who first called out BitConnect as a Ponzi scheme. Shortly after, the US government demanded Bitconnect cease operations which caused a dramatic crash of 90% in the BitConnect token (BCC), which was then rendered entirely useless.
Collectively, investors lost over $3.5 billion.
Another cryptocurrency Ponzi scheme that targeted cryptocurrency investors was OneCoin. Not only was this a Ponzi scheme, but this was also a multi-level marketing scheme that encouraged investors to onboard new members in order to make a commission.
OneCoin was founded by a woman named Ruja Ignatova – who has since evaded custody – and a co-founder, Sebastian Greenwood. Greenwood is currently in jail in the United States.
This wasn’t Ignatova’s first brush with illegitimate activities. She was convicted of fraud in 2012, and another multi-level marketing scam in 2013 before starting OneCoin. Despite this, she would host huge and popular events promoting the coin. She even spoke at Wembley Arena.
The main product the company sold was educational materials, including courses on cryptocurrency (which were largely plagiarised). People that bought the courses supposedly received tokens to mine OneCoins.
Like Bitconnect, OneCoin also promised high returns with very little risk. One of the issues lay in the fact that OneCoin had no blockchain technology behind it.
This is the longest-running cryptocurrency Ponzi scheme to date, having operated from 2014 to 2019. It’s estimated that OneCoin has scammed over $5.8 billion from investors.
How to avoid Ponzi schemes
It’s likely Ponzi schemes will continue to exist, in both the crypto industry and other industries. There are, however, signs to watch out for and ways to avoid them. We have listed some of the warning signs below.
High returns with minimal risk
This is probably the biggest warning sign. If an investment is offering you unusually high returns with little to no risk, be very wary. Cryptocurrencies can be highly volatile, so while large gains are possible, a legitimate cryptocurrency project is unlikely to give you an absolute guarantee of those returns.
Complex or secretive company structure
Transparency is key when it comes to legitimate cryptocurrency businesses. If a company is being secretive about its ownership, team, or business model, this is often consistent with that of a cryptocurrency scam.
The same goes for anything complex. If the investment model is too difficult to understand, or the person you’re dealing with claims it’s too complex right off the bat, then proceed with caution. It is vital that you conduct thorough research before committing yourself to any investment, let alone one that is showing signs of a scam.
Sudden changes in strategy or team
In the cryptocurrency space, things change rapidly, but that doesn’t mean a company should be drastically changing its vision or team without explanation. Sudden changes could indicate the “company” is in trouble and is trying to cover something up.
Issues with paperwork
Legitimate cryptocurrency and blockchain businesses will always have documentation supporting their legitimacy. A crypto Ponzi scheme may actively avoid supplying paperwork or create fraudulent documentation to trick victims.
Difficulties receiving payment
It is a cause for concern if a crypto company is having difficulty processing your withdrawal or if there are excessive delays, especially alongside questionable excuses. Often Ponzi scheme promoters will offer greater returns to try to deter their participants from withdrawing their funds.
It is quite easy for scammers to fake testimonials. Some pay for reviews whilst others rely on bot software to create fake testimonials.
Some signs showing that reviews may be fake are an unusually high number of reviews, lack of detail in the review, multiple reviews that are the same or extremely similar, or inconsistencies between different reviewers.
It can be difficult to spot a fake testimonial, but if something doesn’t seem right it’s always best to do some more research.
Important to Remamber
Cryptocurrency security has advanced exponentially in the short years since its inception. However, a lack of knowledge around it may make newer investors vulnerable so it’s crucial to secure your cryptocurrency.
There are several incredible opportunities within the crypto market; however, common scams such as Ponzi schemes exist to steal your money. This guide has explored the most well-known examples of Ponzi schemes as well as how to identify a Ponzi scheme. As can be said with all investment opportunities, do your own research and be cautious of scams.