Ponzi schemes: keeping yourself safe

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Ponzi schemes: keeping yourself safe

Ponzi schemes are illegal in most countries. You always see on TV how much this Ponzi scheme scammed X people. But most people don’t even know what a Ponzi scheme is, how it works, why it is illegal and how it appeared. Since the crypto market has been seeing many Ponzi schemes scamming people looking to multiply their money, it is an important subject to know for any investor who wants to be intelligent.

What are Ponzi schemes?

A business can be classified as a “Ponzi scheme” if it is persuading investors to deposit any sum of money in the promise of a huge return. Due to false marketing, the investors believe that the profits are coming from a real business with veridic operations, when in fact the money is coming from other investors. How is this possible?

Let’s say a Ponzi scheme gets 100 new investors every month. The main idea is that these new investors deposit new money in the circuit, which are used to pay former investors. This means that there is no real profit or cashflow and in reality is sort of a scaled “Robin Hood” with the roles of old/new instead of poor/rich.

The high returns encourage people to keep their money in the scheme, since their compound effect could result in a “big fortune”, which helps the operators to make smaller, less frequent payments.

Why are Ponzi schemes so dangerous?

Ponzi schemes are dangerous for the public because most of the times they are very subtle. Unexperienced investors might be easily fooled by the higher than average returns. This is why to be an intelligent investor you need to be well informed about the operations of the businesses you are investing in. This might mean reading reviews/opinions from other people who invested, reading balance sheets, understanding the business model, identifying flaws and assessing how healthy the cashflow is. This might need you to look over balance sheets over a longer period. New businesses are of a higher risk, because you don’t have many records to look at. On the other hand, an older, more stable business might be a smarter choice because they have proven to resist over the years.

This is a necessary condition but not the only one, since older business can go bankrupt. A good example is Lehman Brothers which existed for 158 years (bankrupt after 2007-2008 mortgage crisis), or L.F. Rothschild which had been doing good business for 89 years (defunct after 1987 stock market crash). Don’t get me wrong, these are definitely not Ponzi schemes. It is just an example that older businesses have a finite lifecycle.

How did Ponzi schemes originate?

The first major Ponzi scheme was created by Charles Ponzi, an Italian who emigrated to the United States in the early 1900s, hence the name.

According to Wikipedia, he promised clients a 50% profit within 45 days or 100% profit within 90 days, by buying discounted postal reply coupons in other countries and redeeming them at face value in the United States as a form of arbitrage. The scheme collapsed a year later, costing his investors $20 million ($255 million in 2019, adjusted to inflation).

Ponzi schemes in the crypto market

Ponzi schemes in the crypto market are very common. Scammers benefit from the extra protection the anonymity of the blockchain gives them. There are several new crypto Ponzi schemes every month. The latest news about one is from 2 days before the writing of this article (link here).

Possibly one of the biggest and of the most famous crypto Ponzi scheme is BitConnect, which existed between 2016-2018. It promised investors returns up to 40% monthly. To understand this astronomic figure, keeping $1000 in BitConnect for 3 years would have resulted in $50 million. Crazy, right? Well, people have lost a total of $2.6 billion with this scam. How did this happen? After people found out what was the real situation, and after some cease and desist orders BitConnect disappeared. The transactions token crashed from $400 to less than $1 in a few days.

BitConnect is just an example. I encourage you to read more about more such scams in the market. They are very common, so it should not be hard for you to find one.


It is important to know what you are investing in and understand the associated risks. Astronomic returns are not real, so they should not fool you. You probably don’t want to lose your hard-worked money with a Ponzi scheme.

Anyhow, if you want to add something, feel free to leave a comment below. If you want to get in touch with me personally, use this link.

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