How to Identify Ponzi Schemes in Cryptocurrency
Ponzi schemes are fraudulent investments where the previous investors get money through the investments of new investors. Once the organisers can’t bring in more people/investors, the scheme crashes as there is nothing to hold it up, and you realise you didn’t invest in anything. Ponzi schemes have been around long and eventually made their way into cryptocurrency. A Crypto Ponzi scheme is no different and often has similar patterns.
These Ponzi schemes often have attraction points that sound too good to be true. This is your first red flag and something you should pay attention to. Just like any other Ponzi scheme, crypto-related fraudulent schemes also depend on money from new investors. Here are a few ways to identify these schemes, they may not always have the same characteristics, but the core pattern will remain the same:
High Returns With Low Or No Risk:
Guaranteed high returns for an investment with low or no risk sounds suspicious. Anything more than the average 12% returns annually should be considered carefully. You should also be aware of cryptocurrency schemes that promise consistently high returns. Any investment, and primarily while investing in cryptocurrency, not having any risks is impossible.
As mentioned before, Ponzi schemes depend on new investors and old investors. Another method of spotting a Ponzi scheme is when a cryptocurrency project offers you a commission for bringing in new investors. And if it has higher returns with no risk, you should not go for the scheme.
Complex Business Model:
Many organisers convince potential investors by talking about complex strategies to sound authentic but would eventually end up being a pyramid scheme. If the business model or the project can’t be well explained by the organisers, in that case, they can’t explain how the money is generated. They often use big words or attraction points that yield higher returns; it is likely to be a scam and something you shouldn’t opt for.
This comes in if you have already invested in a cryptocurrency project. If you find it difficult to cash out from this project or the return time keeps extending, these are signs of a suspicious project.
The scheme should be considered suspicious if the business or project has a fishy website with very little information or is not registered with the state or government. You should also note the project’s founders; if the founders are anonymous, that should also be considered a red flag.
With Ponzi schemes or any other types of scams, you would often notice desperation in the organisers. These organisers will often pressure the investors to decide in their favour and more often decide without any prior research that might alert the investor about the scam. It is imperative to do thorough research before investing in any crypto project.
A Crypto Ponzi scheme has a few apparent tells, and with enough knowledge about cryptocurrencies, you’ll be able to identify them quickly. And if you’re starting your journey in crypto, it’s better to focus on well-known and established crypto projects, even if the returns are average.