Do you know that every year 1 in every 10 American adults falls victim to a scam or fraud? According to Chainalysis’ 2020 Crypto Crime Report, fraudsters made almost $4.30 billion worth of cryptocurrency across the world. 92% of the $4.30 billion were made with Bitcoin Ponzi schemes.
Ponzi scheme is one of the common forms of scams. In this article, you will learn about the cryptocurrency Ponzi scheme.
What is Cryptocurrency Ponzi Scheme
It is a cryptocurrency investment fraud in which the fraudster attracts and recruits clients to make investments in cryptocurrency.
In the 1920s, a man named Charles Ponzi scammed his clients by promising a profit of 50% within 45 days or returns of 100% within 3 months. He claimed to purchase International Reply Coupons at discounted rates and sell them in the US at the market rate. This is how this investment fraud got its name ‘Ponzi scheme’. He made his claims look legitimate by paying the earlier investors with the funds he received from the later investors. Some investors were receiving actual profits while others were not.
This fraud was revealed after 1 year. Investors lost 20 million dollars in this fraud. Though this investment fraud gets its name from Charles Ponzi, he was not the inventor of this type of fraud. It comes from the 1830s. However, Charles Ponzi carried out a massive scam.
How a Ponzi scheme works?
In a cryptocurrency Ponzi scheme, scammers attract investors with a promising, income generating business plan. A Ponzi scheme works only when there is a consistent flow of funds. Scammers use funds raised from the new investors to make it profitable for the old investors. This lures more investors. This investment fraud comes to an end when scammers fail to find new investors.
Ponzi schemes are common in many industries. Scammers apply the same strategies in all industries including cryptocurrencies.
According to research by YouGov, 81% of Americans know about at least one cryptocurrency. The most popular cryptocurrency is Bitcoin. 35% of the 18% of Americans who invested in cryptocurrencies in 2019 were millennials. Many businesses are using cryptocurrencies for transactions. This shows that the number of people using cryptocurrencies has increased.
This is the reason why the cryptocurrency industry is also a target of fraudsters. Features of Bitcoin and other cryptocurrencies make them the best options for investors. Blockchain-powered cryptocurrencies are volatile and decentralized. These features attract fraudsters as well.
Spotting A Cryptocurrency Ponzi Scheme
You can spot and avoid a Bitcoin Ponzi scheme or any other cryptocurrency Ponzi scheme if you are aware of the following 6 red flags:
Huge Returns With Negligible Risk
There are risks in all types of investments. If you are an investor, you already know that higher rewards come with higher risks.
Promised Consistent Results
You cannot always get consistent returns as there are many factors that affect the value of an asset.
Avoid investment opportunities offered by unregulated firms or businesses. Scammers don’t use registered businesses as this makes it easy for them to carry out scams.
Don’t get any advice for any kind of investment from an individual who is not licensed for this.
Secret And Difficult Business Strategies
If someone is offering you a cryptocurrency investment opportunity but not providing all or clear details about the business strategy, then you can be scammed.
Scammers are reluctant to provide details in writing. You cannot read the terms and conditions of investment if you don’t get any document.
Understand the ins and outs before making any investment. You can work with a registered investment manager to avoid scams. Always be sceptical when it comes to investment.
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