Cryptocurrencies are fascinating and volatile investments with enormous potential rewards. However, some investments claim far-fetched, promising yields–that's where Ponzi schemes of cryptocurrency come in. According to crypto information, this means that the scheme operators pump up the value of the tokens to attract more people and then steal their money once they've been lured in.
It can be challenging to detect because scams may be disguised as stablecoin yield farming, since the two both require putting a certain number of tokens in an exchange. But, only one of them can assure you that your investment reaps value. If you suspect you're being enticed into a Ponzi scheme, read this article to get some tips for spotting one.
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What is a Ponzi Scheme?
A Ponzi Scheme, also known as pyramids, is a fraudulent investment scheme where the operator promises considerable returns to investors. They extract money from new investors to pay off earlier ones.
It was named after Charles Ponzi, who defrauded several investors in the 1920s. The scheme usually ends with the collapse of the business, resulting in massive losses for all involved.
To carry out a scheme like this, operators create a false illusion of success. They tell people that their money is put in high-yield investments when it's used to pay off earlier investors. The operation looks legitimate because new investors are eagerly enticed by the prospect of making big profits quickly.
Once someone puts money into a Ponzi Scheme, there's no assurance of getting it back. The operator can use the money however they please, and investors typically cannot get their assets back. This makes these pyramid schemes incredibly risky than they tell, as any mistake could lead to devastating consequences.
How Ponzi Schemes Work
The operator never has sufficient money to pay back all of the investors. As more and more people join, it becomes less able to meet its obligations. In the end, most Ponzis collapse, and everyone loses their digital investments.
Suppose you suspect that you're investing in a pyramid scheme. In that case, it's important to remember that there's no guarantee of success: if you pull out of the scheme before it collapses, you may still lose some of your money. However, if you stay invested and the scheme collapses, your losses will be much more significant.
How to Spot a Ponzi Scheme in Cryptocurrency
The definition of a pyramid scheme may be simple to remember. However, how can you distinguish an authentic investment from a scam once you're lured? Although these devious schemes may come in various forms, there are similarities you can notice among them.
Below are four warning signs to identify a Ponzi scheme in cryptocurrency:
1. The company's only appealing aspect is that individuals are investing in it.
What separates an investment scam from a legit crypto investment, such as yield farming, is that these schemes can mainly offer how huge the returns can be. Their selling point is on how much you can earn and how many people are investing in it rather than providing real cash flow.
Legit and safe cryptocurrencies also have at most 24 hours of active updates. They have more to offer than the high returns they claim to provide.
2. Multi-level Marketing (MLM)
Sometimes, Ponzi schemes may also be disguised as legitimate businesses. In general, legit cryptocurrencies bring a message that directly encourages you to invest in them. They clearly tell you how you can benefit and trust them despite market volatility.
Meanwhile, this multi-level marketing makes you a scammer by using you as a puppet to encourage others to invest. The operator would ask you to deposit large sums of tokens or money and tell you to invite others to do the same – usually in amounts that are far beyond your financial capability. They attempt to reassure you that there is no risk involved, even though there is always a risk when investing in anything.
3. High Returns, Low Risk
One factor that makes these scams so enticing is that they offer high returns and low risks. Others show up to 400% yield with minimal risks in a short period. The operator would ask you to put your trust in them – rather than provide factual information about how they plan to make profits or repay your investment.
Remember that the common rule in any investment is that high yields also have high risks and low returns make low risks. If they cannot rationally explain how these “too good to be true” returns are done, then chances are that you are engaging in a dubious investment scheme.
4. Unregistered Project
Another thing to note about these investment scams is that they can be underground projects under a bigger company or program. For instance, the business claims that its main objective is to sell a particular product that has no relation to the investment. However, every time they engage with a potential investor, they cannot offer an actual product, or would mainly talk about the scheme.
Crypto companies must be registered under responsible organizations in every country, such as the United States Securities and Exchange Commission for those launched in the US. Check if the business they registered for matches the activities their business runs. Otherwise, you have to rethink the authenticity of the investment.
Conclusion
Cryptocurrency is a growing industry, and with that comes the opportunity for scammers to take advantage of unsuspecting investors. A Ponzi scheme is a fraudulent investment wherein the organizers promise high returns to potential investors but actually pay off earlier ones. To avoid getting sucked into these dubious schemes, do your research before investing in anything crypto-related and familiarize yourself with the signs that indicate you are being taken advantage of.
