Ponzi Scheme Meaning
What is a Ponzi Scheme?
A Ponzi scheme is a financial scam presented to investors as a legitimate investment opportunity with high or quick profits. The scheme generates returns by acquiring funds from new investors to pay off the earlier investors. The term was coined after Charles Ponzi, who duped investors in the 1920s by promising them high returns for investing in international postage stamps. Ponzi schemes are unsustainable, and eventually collapse when the supply of new investors dries up.
In the crypto industry, Ponzi schemes work with digital assets as the investment vehicle. The involved parties may create an “amazing” crypto project that solves a nonexistent problem and plays on investors’ FOMO on high yields. The perpetrators often exaggerate whitepapers to make a project more appealing. The fraudulent parties guise their project as legitimate products/platforms, which often leads to a rug pull scam that leaves investors with a cryptocurrency that is almost worthless.
How to Identify a Cryptocurrency Ponzi Project
Some of the red flags that could indicate a Ponzi scheme include:
- High returns, no risk: Cryptocurrencies are known for their highly volatile nature. A crypto investment opportunity guaranteeing high yields with minimal to zero risks should raise concern.
- Focus is on recruiting new investors: Ponzi schemes rely on a continued flow of new investors to fund the older ones. Hence, a crypto project which seems to be more focused on onboarding more investors than developing its intended use cases.
- No transparent investment strategy: A crypto Ponzi scheme will not fully disclose where the yield comes from. In this case, the investor is the yield.
- Restricted payouts and unrealistic investment claims: Individuals running such a scheme may also control or restrict payouts when there’s a shortage of new investors.