How Crypto Ponzi Schemes Work

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A crypto Ponzi scheme is an investment fraud in which money obtained from new investors is used to pay out old investors. Ponzi scheme operators frequently make the claim that they will invest your money and produce large returns with little to no risk.

However, scammers rarely invest money in Ponzi schemes. Instead, they pay individuals who made earlier investments while also possibly keeping part for themselves.

Ponzi schemes need a steady inflow of new money to survive because they have little to no actual earnings. These schemes frequently fail when it becomes difficult to find new investors or when many existing investors withdraw their money.


Ponzi schemes are named after Charles Ponzi, who defrauded investors in the 1920s with a postage stamp speculation scheme.

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Multi-level marketing schemes are classic examples of Ponzi schemes: here a fraud company targets a person and tells him/her to invest a certain amount. Then, the company then tells him/her to bring in five more investors so that he or can start getting returns. The same cycle follows and it becomes a chain of people getting associated and forming a hierarchy.


The person at the top keeps getting returns, while the person at the bottom keeps adding more people to the scheme. This is also called a pyramid working system.

A person who wants to become rich quickly is the target of Ponzi companies.

What does crypto have to do with Ponzi Schemes?

Cryptocurrencies have become new tools for Ponzi scheme operators today, as it is very easy to win people’s trust, and the return on cryptocurrencies can be manyfold.


However, there is always a catch to this as investors are lured by higher returns without understanding the crypto projects and the fundamentals that make them unique. This aspect is rarely understood by retail investors, which get hooked on getting rich overnight.

Many say Bitcoin is a Ponzi scheme and many investors have been duped by scammers in return for higher returns.

Just like other traditional investments like shares, mutual funds, and bonds, Bitcoin is too a stable venture, however, due to its volatility, it has become a target of governments globally.


This volatility also catches the attention of Ponzi scheme operators that want to tap Bitcoin’s popularity to lure investors for higher returns.

Today, the price of one Bitcoin is around $24,000, which was $68,000 a few months back.

How Does The Ponzi Scheme work?

Providing high profits:

Every Ponzi investment tends to provide higher returns with no or low risk. Any Ponzi schemes investment that guarantees fixed returns, or promises higher returns with low risk should be taken with a grain of salt.


Always commit high returns:

They provide high returns and have a tendency to rise instantly. They even share initial profits with investors to gain their trust and then once the trust is built among investors, they vanish overnight.

Investments not registered:

Investments that have not been registered with any government authorities or state securities authorities are frequently used in ponzi scams. They operate in a very secretive way and charge people a very high cost for investing their money for providing higher returns.

No minimum requirements for investors:

You must be an accredited investor to participate in the majority of real private investment opportunities. However, investment possibilities in Ponzi schemes are not fixed. One can invest any amount of money, and returns are on that basis.


Problems with the papers:

Ponzi schemes returns are never given in return, it is always verbal. They don’t give any prospectus and paper that states where the money will be invested. There is no disclosure, if anyone asks for it, they are shown the door.

Trouble in getting paid back:

If you don’t get paid or are having trouble getting your investment back, be wary, your investment is at risk.

How To Identify Crypto Ponzi Schemes

Ponzi scheme administrators may offer participants larger investment returns in order to ‘roll over’ promised payouts.


It comes via a person with whom you have a common interest: Fraudsters frequently prey on the trust that comes from belonging to a group that has a common bond, such as a national, ethnic, or religious association.

To promote the ‘investment’, reputable figures or notable members may occasionally be recruited—knowingly or inadvertently.

Ponzi schemes have become a major cause of concern for the crypto sector, as many cases have been reported on how people have been duped by Ponzi scheme operators in return for higher profits & returns.


Cryptocurrency is a technology sector, just like the traditional finance & banking sector – one that needs to do proper research before making any investment, just like we do in buying shares of mutual funds.

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