With the rise of cryptocurrency, scams have also become more sophisticated.
One of the most common scams is the Ponzi scheme, where money from new investors is used to pay returns to earlier investors rather than generating legitimate profits.
Ponzi Scheme Explained
A Ponzi scheme is a fraudulent investment scam that promises high returns with little or no risk. However, instead of generating profits through legitimate business activities, the scheme pays earlier investors using money collected from new investors.
This creates the illusion of a successful investment, attracting more people to put their money into the scheme. Since no real profits are generated, the scheme depends entirely on a continuous influx of new investors.
Here is how a Ponzi scheme is normally operated:
- At first, investors may receive their promised returns, which builds trust and encourages them to recruit others.
- As more people join, the scam grows, and the operator may even allow early withdrawals to make the scheme seem credible.
- However, because the payouts are not funded by actual profits but by new investments, the structure is unsustainable.
- Eventually, the scheme collapses when it can no longer attract enough new investors to cover the withdrawals of earlier participants.
At this point, the organizer often disappears with the remaining funds, leaving most investors with huge losses. This cycle makes Ponzi schemes appear profitable at first, but they are destined to collapse.
The Red Flags: Signs of a Ponzi Scheme
Guaranteed High Returns with No Risk
- Legitimate investments always carry some level of risk. If a crypto project promises fixed, high returns with zero risk, it is likely a scam.
Unclear Business Model
- If the project cannot clearly explain how it generates revenue other than recruiting new investors, it is a red flag.
Referral-Based Rewards
- While referral programs exist in real investments, a Ponzi scheme relies heavily on recruiting new investors to sustain payouts.
No Real Product or Utility
- A real crypto project has a working product, blockchain technology, or service. Ponzi schemes often lack actual use cases.
Lack of Transparency
- If the company hides team details, financial records, or uses vague language, it could be a scam.
Pressure to Invest Quickly
- Ponzi schemes often create urgency, using FOMO (fear of missing out) tactics to rush people into investing.
Difficulty Withdrawing Funds
- If investors struggle to withdraw their money, the scheme may be collapsing.
Be Cautious: Common Ponzi Schemes Disguised as Crypto Investments
Cloud Mining Scams
- Promise unrealistic mining profits.
- Cloud mining services claim to rent out computing power for cryptocurrency mining. Investors pay a fee to participate, expecting passive income from the mining rewards.
HYIP (High-Yield Investment Programs)
- Claim to offer daily or weekly returns.
- These investment schemes promise very high returns (for instance, 5% to 10% per day or 300% per month) on deposits. These platforms claim to generate profits from trading, arbitrage, or other investment activities.
Fake Staking/Yield Farming
- Offer extremely high APY with no sustainability.
- Some crypto platforms claim to offer staking or yield farming with outrageously high annual percentage yields (APY), sometimes exceeding 1,000% or more. Investors are asked to deposit tokens into a platform and receive “guaranteed” rewards.
Multi-Level Marketing (MLM) Coins
- Require you to recruit others to earn profits.
- MLM crypto scams promote “investment packages” where people can earn money by recruiting others into the system. Instead of real blockchain technology, the main focus is on building a downline to earn commissions.
The Green Flags: Signs of a Legitimate Crypto Investment
Clear Whitepaper and Roadmap
- A real project has a well-documented whitepaper explaining its purpose, technology, and goals.
Registered and Transparent Team
- Legitimate projects disclose their founders and developers. Research their background to verify credibility.
Verifiable Smart Contracts and Technology
- Blockchain-based projects should have smart contracts that can be audited for security.
Sustainable Revenue Model
- Whether it is DeFi, staking, gaming, or payments, a legit crypto project generates revenue beyond new investor money.
Regulatory Compliance
- Many credible crypto investments register with regulatory bodies or adhere to legal standards.
Active Community and Development
- Real projects have active GitHub repositories, regular updates, and engaged communities.
Token Liquidity and Exchange Listings
- Tokens of legitimate projects are usually listed on reputable exchanges like Binance, Coinbase, or Kraken.
Check out
These BitPinas articles for tips on protecting your Bitcoin and digital assets:
This article is published on BitPinas: Crypto Ponzi Schemes: How to Spot and Avoid Cryptocurrency Scams
What else is happening in Crypto Philippines and beyond?
