Disclaimer: The information's contained in this explanation is the result of my understanding of Ponzi Schemes and may contain some errors. Search and confirm about it.
Table of contents
1. Introduction
2. What is a Ponzi scheme?
3. How Does a Ponzi Scheme Work?
4. How to Recognize crypto Ponzi Schemes?
5. How to protect yourself?
Introduction
Most individuals who invest in cryptocurrencies want make some profits so the return on investment (ROI) is supposed to be one of the things to study before thinking about investing.
With the increase in projects and methods of investing in cryptocurrencies, the risks increased, and therefore risks must be redefined, the difference between them and Ponzi schemes.
What is a Ponzi scheme?
The name goes back to Charles Ponzi who became famous for his fraudulent system of earning money, as he managed to defraud hundreds of victims.
Ponzi schemes work by paying profits to former investors with funds from newer investors and therefore the belief comes that profits come from product sales and thus continue to invest and the promise of generating high-value returns with little or even no risk.
In the end, other investors discover that they are the source of the funds and therefore they will not receive returns and they may lose their money.
How Does a Ponzi Scheme Work?
The main point is that scammers never invest money that they redistribute investor money to believe that they are making profits, and therefore you need a steady flow of money to survive, otherwise they will run away with the money.
What makes this type of fraud appropriate in cryptocurrencies is the fact that scammers are more difficult to track and there is not enough regulatory framework to protect investors and thus may escape all investments without paying any returns.
How to Recognize crypto Ponzi Schemes?
It is not an easy task, but there are some indicators and red Flags which make more likely the project is to be Ponzi Scheme than as an investment:
- Promises of high profits with zero risk: “The higher the risk, the higher the reward” When you hear that there are no risks, something is wrong.
- Consistent returns, regardless of the market condition: The yield from investing varies according to the nature of the market, but when a project talks about double profits in a short period, regardless of the market.
- Lack of transparency: how to get profits, the nature of the investment, who the investors are, information about them. They try to sell you dreams without providing detail about them.
- Don’t offer real products or services: Often the investment is a dream, but there are no real services.
- Increasing minimum investment: These projects need to grow rapidly, and therefore they need to increase their capital, which is higher than the minimum withdrawal amount.
- It comes through someone with a shared affinity: Often these projects come from a well-known personality or someone you trust and thus reduce caution and search for them, sometimes they lie to developers or give false information.
How to protect yourself?
- Be skeptical: Ask a lot, understand how you benefit from the investment, how the project works, read about them and ask people in this forum or who you trust.
- Do not trust. Verify: Do not trust the opinions of experts, and do not listen to all details without checking them.Ask for registration information, legal papers and verify that they are correct.
- Check out the seller, white paper, developers, their road map, and all the details: Scammers are always lazy so you will find some errors or misinformation.
- Understand the investment: Do not invest in things you know nothing about.