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How to Spot and Avoid Cryptocurrency Ponzi Schemes

Kayla Matthews

If you’re thinking about investing in cryptocurrency, it’s essential to be aware of potential Ponzi schemes that relate to the sector. Knowing about some common characteristics of Ponzi schemes can help you avoid them, whether they’re associated with cryptocurrency opportunities or other industries.

What Is a Ponzi Scheme?

A Ponzi scheme uses the money from new investors to pay older investors, so it involves enticing unsuspecting people to get involved. Eventually, the plan collapses when it becomes impossible to attract enough new investors to provide for the people who were initially part of the operation.

Are Cryptocurrencies a Collective, Giant Ponzi Scheme?

The president of the World Bank, Jim Yong Kim, is one prominent figure who compared cryptocurrencies to Ponzi schemes. When citing his reasoning, he brought up the fact that there’s a lack of clarity about how cryptocurrencies work. He may have also made his conclusion due to the high returns some people can get by investing in cryptocurrencies.

One of the warning signs of a Ponzi scheme is a promise of above-average returns. However, many of the news articles discussing cryptocurrencies mention volatility, not ultra-high rewards.

Also, most sensible investors who found success with cryptocurrencies advise people who are new to the digital money to exercise caution. In the cryptocurrency industry at large, there are no concentrated recruitment efforts meant to get new people on board continually.

So, although the entire cryptocurrency sector is not a Ponzi scheme, some cryptocurrency companies are associated with Ponzi scheme allegations.

Blockchain and Its Role in Safeguarding Against Ponzi Schemes

All thorough discussions about investing in cryptocurrencies without getting scammed by a Ponzi scheme or another deceptive practice must address the blockchain. It’s a public ledger of all cryptocurrency transactions. No one can alter a valid transaction on the blockchain, and that’s one of the reasons people say the blockchain will increase transparency.

While evaluating future blockchain use cases, people sometimes bring up software-defined wide-area networks (SD-WAN). Businesses use them to facilitate communications across long distances while reducing latency and enjoying other benefits.

In the cryptocurrency realm, experts think SD-WANs could work well with blockchain technology since they provide dynamic amounts of bandwidth, which could speed processing times. Furthermore, SD-WANs offer packet-level flow data for node content related to every blockchain transaction, providing even more visibility for those events.

Researchers also propose the possibility of using data-mining techniques to pore over blockchain entries and look for evidence of Ponzi schemes.

Other Tips for Avoiding Ponzi Schemes

However, both the combination of SD-WANs with the blockchain and using data analysis to spot suspicious activities are still emerging ideas. That means it’s necessary to look for and avoid cryptocurrency Ponzi schemes in other ways — like these four.

1. Pay Attention to Warnings From People in the Cryptocurrency Community

Bitconnect is one company that received cease-and-desist letters from North Carolina and Texas and finally shut down after long-standing allegations it was operating a Ponzi scheme.

The establishment allowed people to lend their cryptocurrencies to Bitconnect in exchange for significant returns that varied depending on the length of the loan. Plus, the company had a very active referral program that encouraged people to have their friends sign up and use referral links.

2. Do Your Research

You can find lists of cryptocurrency companies suspected of Ponzi schemes, and it’s okay to use them as starting points. However, don’t ever blindly trust such resources without performing research to make sure they’re genuine.

3. Be Careful of Cryptocurrency YouTube Stars

A YouTube star known as CryptoNick came under fire for promoting Bitconnect before it fell apart. On screen, he was as surprised as everyone else when Bitconnect ended. But, people still wonder if some of the advice he gave made people invest in a company that was not legit and if CryptoNick had some advance knowledge about Bitconnect’s demise.

4. Watch Out for New Types of Coins and Get Educated

Bitcoin is arguably the most well-known cryptocurrency, but countless other varieties serve as potential investments. At first, you may think that by pouring your money into at least one of them, you’ll get ahead of the curve.

But, some of the newest cryptocurrency Ponzi schemes are those involving initial coin offerings (ICOs). By the time authorities halted OneCoin, a fraudulent ICO, it had already allegedly sent at least $350 million in scammed funds through a German payment processor.

Some ICOs are legitimate, but there were also known scam artists heading up OneCoin with the help of fake credentials. Analysts say that as cryptocurrencies become increasingly prevalent and ICOs continue their dominance, the likelihood of people getting scammed because they don’t understand the basics of those investments will go up.

If you’re unsure about a particular ICO, don’t invest in it before acquiring the information you need to make a sensible decision.

Don’t Ignore Warning Signs

In closing, you can do a lot to protect yourself against crypto Ponzi schemes by paying attention to things that seem suspicious. It’s crucial to not jump into an investment opportunity without carrying out adequate research. If you uncover eyebrow-raising facts, hold off on making what could be a financially ruinous decision.


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