How to Spot Ponzi Schemes Using Cryptocurrencies

How to Spot Ponzi Schemes Using Cryptocurrencies

Unfortunately, when investing money, alongside the risk of a bad investment, i.e you end up in a negative, there is also a risk of the investment being a scam.

Rug pulls, Ponzi schemes, and cloud scams are just a few of the fraudulent investing techniques that people sometimes fall for.

Even seasoned investors can fall into an investing trap and lose a lot of money before they realize what’s going on.

We have previously spoken about cryptojacking as well as some of the most popular online Bitcoin scams.

Today, we’re going to focus on Ponzi schemes and help you understand how to spot Ponzi schemes that use cryptocurrencies to lure in potential victims.

What Is a Ponzi Scheme?

The term Ponzi scheme is named after notorious swindler Charles Ponzi who conned many out of a lot back in the 1920s. Although, this type of con can be traced back decades earlier by the likes of Adele Spitzeder in Germany and Sarah Howe in the United States.

This type of scam involves the payment of purported returns to existing investors from funds contributed by new investors. Those in charge entice new investors by promising high rates of return on their original investment with no risk.

However, when the money is handed over, that money is not legitimately invested. Rather, they are given payments that take from the funds earlier investors had deposited.

This reassures the new investor that they are going to be given the payments they were promised.

This may also encourage them to invest even more money without knowing that they will receive only a handful of payments in return before they never see another penny.

Of course, as well as using investor money to convince new investors of the great returns, the organizers also take a cut for themselves each time, quickly building up hefty amounts for themselves.

Eventually, though, there is not enough money to spread around to the new investors or to keep old investors happy.

Since zero returns are being made on the money in real life, the money runs out. New investors don’t join and old investors start to become agitated as their promised regular payments have stopped coming.

It’s at this point that the scheme will collapse. The sham is exposed. But it’s too late. Those in charge have made their money and are never to be seen again.

As with many frauds, Ponzi scheme organizers often use the latest innovation, technology, product, or growth industry to entice investors and give their scheme the promise of high returns.

Potential investors are often less skeptical of an investment opportunity when assessing something novel, or cutting edge.

Potential Schemes Using Cryptocurrency

Cryptocurrency holds value, whether it be high or low, it still has value. Especially crypto like Bitcoin which is the most popular and most valuable crypto on the market.

Unfortunately, when something holds value, there will always be people who are looking for a quick way to get it for themselves without paying.

And, since cryptos are regulated by any government, if you are scammed, there will be no one who can help you get your money or assets back.

According to The SEC’s Office of Investor Education and Advocacy, there has been an increase in the number of scams and Ponzi schemes involving cryptocurrencies. This is due to the more anonymous and hard-to-trace nature of the currency. There are fewer investigations, regulations, and overseers, making it easier for criminals to dupe their victims.

In one notable case that The SEC’s Office of Investor Education and Advocacy dealt with namely SEC v. Shavers,

“The organizer of an alleged Ponzi scheme advertised a Bitcoin “investment opportunity” in an online Bitcoin forum. Investors were allegedly promised up to 7% interest per week and that the invested funds would be used for Bitcoin arbitrage activities in order to generate the returns.
Instead, invested Bitcoins were allegedly used to pay existing investors and exchanged into U.s. dollars to pay the organizer’s personal expenses.”

It Only Takes One Person

According to the case, “The SEC alleges that Shavers, who lives in McKinney, Texas, paid 507,148 Bitcoin in investor withdrawals and purported interest payments.  He transferred at least 150,649 Bitcoin to his personal account at an online Bitcoin currency exchange. 

Shavers suffered a net loss from his day trading, but realized net proceeds of $164,758 from his sales of 86,202 Bitcoin.

Shavers transferred $147,102 from his personal account at the online Bitcoin currency exchange to accounts he controlled at an online payment processor as well as his personal checking account. 

He used this money to pay his rent, utilities, and car-related expenses as well as for food and retail purchases and gambling.”

Only one man managed to con more than 85,000 BTC from unsuspecting investors. While there have been instances of individuals stealing even more than this during their own scams, this is an awful lot of BTC lost for people who will never get their money back.

How to Spot a Ponzi Scheme

Undoubtedly, you don't want to end up like those who have innocently invested their money and then lost everything. You must always stay vigilant when it comes to investing money or cryptocurrency and double-check everything.

Fraudsters are very good at making everything look legitimate from the outside.

To help you spot a potential scam, the SEC has listed some of the most common red flags that they see during their investigations.

These flags are easy to spot for those who have prior knowledge since the majority of Ponzi schemes share common characteristics.

The red flags you should be looking out for are listed below:

1. High investment returns with little or no risk

Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. “Guaranteed” investment returns or promises of high returns for little risk should be viewed skeptically.

2. Overly consistent returns

Investments tend to go up and down over time, especially those seeking high returns. Be suspect of an investment that generates consistent returns regardless of overall market conditions.

3. Unregistered investments

Ponzi schemes typically involve investments that have not been registered with the seC or with state securities regulators.

4. Unlicensed sellers

Federal and state securities laws require certain investment professionals and their firms to be licensed or registered.

Many Ponzi schemes involve unlicensed individuals or unregistered firms Secretive and/or complex strategies and fee structures. It is a good rule of thumb to avoid investments you don’t understand or for which you can’t get complete information.

5. No minimum investor qualifications

Most legitimate private investment opportunities require you to be an accredited investor. You should be highly skeptical of investment opportunities that do not ask about your salary or net worth.

6. Issues with paperwork
Be skeptical of excuses regarding why you can’t review information about the investment in writing. Always read and carefully consider an investment’s prospectus or disclosure statement before investing. Be on the lookout for errors in account statements which may be a sign of fraudulent activity.

7. Difficulty receiving payments

Be suspicious if you don’t receive a payment or have difficulty cashing out your investment. Ponzi scheme organizers sometimes encourage participants to “roll over” promised payments by offering higher investment returns.

8. It comes through someone with a shared affinity

Fraudsters often exploit the trust derived from being members of a group that shares an affinity, such as a national, ethnic, or religious affiliation. Sometimes, respected leaders or prominent members may be enlisted, knowingly or unknowingly, to spread the word about the “investment.”

Who Can Help?

So, if you’ve been the victim of a fraudulent scheme involving cryptocurrency, who can you turn to?

Unfortunately, as we mentioned previously, due to the near anonyn¡mous nature of cryptocurrencies, and the lack of regulation, it can be hard to ever get to the bottom of your case.

However, for those in the United States of America, you can contact:

U.S. Securities and Exchange Commission Office of Investor Education and Advocacy

100 F Street, NE Washington, D.C. - 20549-0213 - (800) 732 0330.

They can’t guarantee they will be able to recover any funds, but it’s the best place for you to start.

For anyone outside of the States, your country’s equivalent will be the right option for you to ensure that your situation is looked at.

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