Post by account_disabled on Mar 6, 2024 22:36:54 GMT -5
Ponzi schemes are a common scam that pays off the debts of early “investors” with money contributed by later “investors.” However, there is no truly viable business model.
Be wary of anyone offering unrealistic returns or inviting you to join an exclusive “cryptocurrency investment plan.”
Have you been a victim of a scam? Report the incident immediately to the relevant authorities and the Binance customer support team.
Discover cryptocurrency Ponzi schemes and how to identify and avoid them in our latest edition of “Know All the Scams.”
What is a cryptocurrency Ponzi scheme?
Imagine that someone tells you that you can earn a fortune in a short time and with little risk, and that all you have to do is a small investment. On top of that, imagine being told to spread the word about this supposed “opportunity” to as many people as you can.
This dynamic is the hallmark of a Ponzi scheme, a common scam that pays off the debts of early “investors” with money contributed by later “investors.” Ponzi schemes occur in all sectors and can arise in any environment that allows investment activity. Unfortunately, these scams are widespread in the cryptocurrency world.
In this article, we'll delve into how Ecuador Mobile Number List cryptocurrency Ponzi schemes typically develop and, more importantly, what you can do to protect yourself against them.
How Ponzi Schemes Work
In most Ponzi schemes, there is no actual “investment” and the vast majority, if not all, of the profits go to the scammer. Money is transferred from new victims to subsequent victims, and this redistribution of funds creates an appearance of profitability that keeps the scam going.
As long as there is a sufficient influx of members, financial fraud continues. Once exhausted, the scheme reaches a breaking point and collapses.
Below we summarize the progression that usually occurs in a Ponzi scheme, condensed into three steps.
Step 1: Create an attractive scam
The Ponzi scheme is one of the oldest scams. Its origins date back to the early 1920s with Charles Ponzi, an Italian immigrant to North America who promised investors a 40% return in just three months.
Charles' scam was simple: pay yesterday's investors using today's investors' money and pocket the remaining profits. His promise of 40% of his share continued to attract unsuspecting victims and he gathered over 30,000 of these “investors” in less than six months.
Charles was arrested when his scam collapsed, and his “investors” lost around $20 million (approximately $207 million adjusted for inflation). By comparison, Bernie Madoff's company, run in a similar way, collapsed in 2008, costing its "investors" around $18 billion. This case is often considered the largest Ponzi scheme in history.
Step 2: Reward early investors
Ponzi schemes intentionally pay promised returns to early investors, who, in turn, will believe the scheme is legitimate and will go so far as to tell their friends to invest.
Nowadays, it is also quite common to see Ponzi schemes that advertise additional “rewards” or “bonuses” for those who successfully invite new investors. Some scammers require their victims to necessarily invite more people to continue making money. With this technique, scammers find new victims with minimal effort.
In some cases, there are scams with elaborate reward structures in which “investors” or “employees” must recruit other victims to earn their wages. These types of cases are often known as pyramid scams.
Step 3: the collapse
In the end, the house of cards will collapse.
The ringleaders often put an escape plan into action once they reach a certain level of profit or when they sense that the scam is about to collapse. On the other hand, although there are a small number of investors who make profits, the vast majority go bankrupt and are left with nothing.
To help users identify Ponzi schemes in the cryptocurrency world, our Binance risk team has developed the following formula after analyzing numerous real-world cases: