Crypto Ponzi Schemes

Named after Charles Ponzi, a fraudster who invented this crooked investment method, Ponzi schemes attract money from investors, promising them easy, risk-free returns. Preying on the greed and gullibility of investors, Ponzi schemes pay new investors with money others have invested before them. Ponzi schemes do not generate real profits through real investments. Eventually, all such schemes inevitably fail.

Crypto Ponzi Schemes

Ponzi schemes are notoriously murky, involve false promises, and may employ high-pressure sales tactics, including referral rewards, social pressure, and aggressive marketing.

The cryptocurrency world opened a pristine arena for crooked developers and “business” people. And many of them jumped at the chance to use the new technology to fleece people rather than create something useful.

Bitconnect is perhaps the most notorious crypto Ponzi scheme. It would be worthy of a theoretical crypto Charles Ponzi award as it bore all the hallmarks of Ponzi schemes with pride. Some other examples of crypto Ponzi schemes are:

  • PlusToken
  • OneCoin
  • MiningMax

Ponzi schemes are like fungal infections. They refuse to disappear. People keep repackaging them whenever a new technology allows them to do so.

Brief History of Ponzi Schemes

The person responsible for unleashing the bane of Ponzi schemes upon humanity was Italian swindler Charles Ponzi. In 1919, Ponzi launched an investment scheme in Boston, Massachusetts, claiming to generate profits from the value difference of international postal reply coupons.

People didn’t understand the scheme well, but the initial investors pocketed 50% returns in 45 days and 100% returns in 90 days on their investments. So they allowed greed and excitement to sweep them up and played along. As long as enough new money came in, Ponzi managed to pay earlier investors. Soon, the scheme collapsed under its weight, however. And a 1920 article in The Boston Post exposed it for the fraud it was.

Ponzi went to jail for his part in the scheme, but the damage had been done. Fraudsters like to dust off his MO (Methods of Operation) every time the opportunity presents itself. The emergence of cryptocurrencies was such an opportunity. As some toiled to create legitimate utility through their crypto projects, others used the fame of Bitcoin to swindle people. An angle that is common among crypto Ponzi schemes is the claim that they are “better than Bitcoin.”

The Convergence of Ponzi Schemes and Cryptocurrencies

Unfortunately, cryptocurrencies lend themselves extremely well to Ponzi schemes:

  • They work online
  • They are anonymous to a degree
  • Transactions are final
  • They know no geographical boundaries

Through them, fraudsters can target everyone all over the world. No one is safe.

Since they represent currencies and allow for value transfer, cryptocurrencies can be used in many creative ways for Ponzi schemes. Some key elements of the convergence of cryptocurrencies and Ponzi schemes are.

  • The pseudonymity or anonymity of cryptocurrencies is a convenient feature for scammers and fraudsters who can pocket money online without revealing their identities.
  • Crypto-based Ponzi schemes lack an underlying value-generating structure or utility. They pay old investors with the money new investors provide.
  • ICOs represent a way of raising money for crypto projects that is legally questionable. Initial coin offerings allow fraudsters to collect money easily online by selling the worthless digital assets they print for real money.
  • The cryptocurrency industry has always lacked regulatory oversight. A new technology, cryptocurrency has existed in a legal grey area savvy fraudsters have been quick to exploit.
  • Pump-and-dump schemes are relatively easy to execute online. Creating hype and drawing in more investors through the skyrocketing asset price is also relatively easy.
  • Crypto-based Ponzi schemes generate value for fraudsters much faster than their real-life counterparts due to the quicker spread of information.

Bitconnect, with its heyday in 2016-2018, was a crypto-based lending scheme claiming to generate value through a trading bot. It relied heavily on referrals and employed an army of online marketers who aggressively attacked anyone pointing out the obvious inconsistencies of the “business model.”

Bitconnect went under in January 2018, when US authorities cracked down on its activities.

The FTX crypto exchange was a front for an elaborate web of illicit activities, including shady campaign contributions, securities fraud, money laundering, and wire fraud. A civil suit against the perpetrators of the scheme alleged the use of a Ponzi scheme to move customer funds between corporate entities.

Sam Bankman-Fried, FTX’s CEO and the brains behind the scheme was arrested and indicted on eight criminal charges.

PlusToken focused on China, South Korea, and Japan. It promised returns of 30% per month on the back of a shaky business model involving crypto literacy and a wallet. It managed to attract 3 million investors before going belly-up following a series of arrests.

Understanding the Red Flags

To help you recognize crypto-based Ponzi schemes, here’s a look at some of their common traits.

  • Ponzi schemes tend to guarantee the returns they offer. To trigger greed in would-be victims, they dangle the possibility of unrealistically high profits within short time frames.
  • Ponzi schemes need new investors to stay afloat. They focus on recruitment and referrals. Encouragement to involve others is one of the most telltale signs of a Ponzi scheme.
  • Anonymity and lack of transparency are other hallmarks of crypto Ponzi schemes. The people behind them are, understandably, not keen on revealing their identities.
  • Ponzi schemes often use high-pressure sales techniques. They look to get money from investors as quickly as possible. They may use FOMO (Fear of missing out) or time-limited offers to pressure would-be victims into taking action.
  • Things often don’t add up with Ponzi schemes. If you take a close look at their business models, they don’t make sense. The math doesn’t work. They cannot generate profits in legitimate ways.

Scammers can lure people into Ponzi schemes in many ways. They can:

  • Produce positive testimonials and social proof. Early “investors” may walk away with some profits from a Ponzi scheme, providing word-of-mouth proof about the “legitimacy” of the “investment.”
  • The crooks may lose some money on such victims, but they gain more as they recruit more victims.
  • Promote a multi-level pyramid structure that rewards participants as they recruit more and more people.
  • Create the illusion of legitimacy through sophisticated promotional materials, positive testimonials, and elegant websites.
  • Create a sense of exclusive access to encourage and hasten participation.
  • Set up complex investment strategies that many people can’t understand yet accept, listening to greed instead of logic.

Be aware of these MLM/Ponzi strategies and consider them red flags when they pop up.

The Impact of Crypto Ponzi Schemes

Sophisticated and large crypto Ponzi schemes can have a profoundly negative impact on legitimate crypto markets and society.

When they unwind, they can crash the price of unrelated, legitimate crypto assets. They cause a loss of investor trust in assets that aren’t involved in the schemes. Every time an operation like FTX goes belly up and its FTT tokens burn their holders, the public blames Bitcoin for some reason.

Crypto Ponzi scams invite regulatory scrutiny and oversight. When authorities pass regulations, they are more likely to crack down on all of crypto due to these activities.

In addition to affecting trust, these schemes hinder growth and drive resources and attention away from crypto projects that matter.

Preventive Measures and How to Stay Safe

As an individual crypto industry participant, you can:

  • Educate yourself about the pitfalls of crypto investment schemes.
  • Learn how to spot the red flags.
  • Voice your opinion on scams you identify as such.
  • Warn others if possible.
  • Never fall for anything that promises you returns that seem too good to be true.

Regulatory bodies can implement comprehensive and clear crypto regulations. Regulations can include:

  • mandatory licensing
  • investor education
  • campaigns to raise awareness
  • active enforcement of rules
  • International cooperation
  • monitoring and tweaking regulations

Enhanced regulation is one of the strongest present and future trends in crypto fraud prevention. Technology, like enhanced blockchain transparency and AI, can also play a role in identifying patterns indicative of crypto Ponzi schemes.

Case Study Analysis

Bitconnect was a textbook crypto Ponzi bearing all the hallmarks of such schemes. It featured aggressive marketing, legions of fans, and followers who would verbally attack everyone who called the scheme suspicious.

  • Bitconnect promised investors extraordinary returns on their investments.
  • It featured a lending program that allowed investors to buy the BCC token and lend it to the platform. This way, it artificially inflated the price of the worthless token.
  • It featured a typical pyramid-shaped referral system, rewarding participants based on those they referred and those their referrals referred.
  • The organization behind Bitconnect revealed nothing about the people behind it and the mechanisms through which it would generate sustainable profits.
  • Following the collapse of the Bitconnect Ponzi, litigation followed that exposed the true nature of the operation.
  • Bitconnect caused damage to investors, eroded trust in the crypto industry, and invited increased regulatory scrutiny.


Despite the utility cryptocurrencies can provide, or perhaps because of it, crooks can’t help but see it as a paradise for scammers and Ponzi schemes. Requiring a higher level of technical understanding, the industry leaves plenty of room for those less educated to make mistakes and get burnt.

To avoid crypto fraud and Ponzi schemes, learn about the red flags. Check your greed. Always think things over with a cool head before you commit funds to an investment. Analyze and understand how something that purports to make money executes its business plan. If things don’t add up, yet people promise you fabulous returns as long as you jump aboard quickly, know that you’re dealing with a crypto Ponzi scheme.

Although opportunities for Ponzi schemes will grow fewer with increased regulation, the scams will probably never disappear. Whenever someone invents a technology to address a need, someone else will inevitably hijack it and use it for a crooked purpose.

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