The crypto world has experienced an increase in Ponzi schemes since 2016 when the market gained mainstream prominence. Many shady investment programs are designed to take advantage of the hype behind cryptocurrency booms to beguile impressionable investors.
Ponzi schemes have become rampant in the sector primarily due to the decentralized nature of blockchain technology which enables scammers to sidestep centralized monetary authorities who would otherwise flag or freeze suspicious transactions.
The immutable nature of blockchain systems that makes fund transfers irreversible also works in the scammers’ favor by making it harder for Ponzi victims to get their money back.
Speaking to Cointelegraph earlier this week, Johnny Lyu, CEO of crypto exchange KuCoin, said that the sector was fertile ground for these types of schemes due to one main reason:
“The industry is full of users eager to invest their money, and there is virtually no regulation that would stop projects from hiding their malicious intentions.”
“Until clear and internationally approved financial regulation of the crypto industry is set in place, it will continue to witness the rise and collapse of Ponzi schemes,” he added.
How Ponzi schemes work
The Ponzi scheme phrase emerged in 1920 when a swindler named Charles Ponzi marketed a high-returns program to investors which supposedly leveraged postal reply coupons to achieve impressive earnings.
He promised investors returns of up to 50% within 45 days or 100% interest within 90 days. True to his word, the first group of investors got the claimed returns, but unbeknownst to them, the money they received was actually from later investors. The cycle was designed to lure new investors and enabled Ponzi to steal over $20 million.
While he wasn’t the first to use such a scheme to scam people, he was the first to use it to such a scale. Hence, the technique was named after him.
In a nutshell, a Ponzi scheme is a fake investment program that promises astronomical gains to clients but uses money collected from new investors to pay early investors. This helps the swindlers behind such operations to maintain some semblance of legitimacy and entice new investors.
That said, Ponzi schemes require a constant flow of cash to be sustainable. The ruse usually comes to an end when the number of new recruits falls or when investors choose to withdraw their money en masse.
How to spot a crypto Ponzi scheme
There has been a sharp rise in the number of Ponzi…
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