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What are Ponzi Schemes?

Ponzi schemes are a form of fraud or chicanery in which someone is paid with investments, often by promising skyrocketing returns. An early example of a Ponzi scheme was in the early 1900s, when Joe Kennedy, a Boston banker, put money into stocks but promised his investors that he would be investing their money too. While many invested successfully, others lost large sums, fueling the legend that everyone is a “penny stock” or a “penny stock promoter.”

Crypto Scams

Cryptocurrencies are only three years old. For the first few years, scammers continued to prey on early adopters, focusing on unregulated initial coin offerings (ICO). In August 2017, the SEC said that ICOs were a massive fraud.

How to Avoid Ponzi Schemes

If the scam is based on early investors claiming their funds have been frozen or are at risk of being confiscated, then you should also be wary. The key is to ask if they’re available on a refunding platform like Abra or Stellar (as some decentralized digital currencies are not yet ready for mainstream use).

Often, scam artists capitalize on fears over dwindling fiat currency or access to cryptocurrencies by selling white papers or business plans that suggest the platform will put you in a position to profit from an investment. There is little reason to support the concept of a bitcoin mining farm in Haiti that does nothing except produce nothing.

The Dangers of Ponzi Schemes

Ponzi schemes are named after Charles Ponzi, a speculator who defrauded investors in the 1920s and 1930s. By promising high returns to early investors, he was able to attract new investors. As a result, the amount of money Ponzi allegedly stole to repay the older investors multiplied.

If a cryptocurrency startup you’re thinking of investing in doesn’t have a working product or service, and the startup has already raised the money to get it done, they’re likely a scam. Investing in a scam is like betting on the wrong horse in the middle of the race. Investors who put in their money to that horse don’t get their money back; it’s a lost cause.

There are more than a few scams to be wary of, though.

How to Spot a Ponzi Scheme

A Ponzi scheme is essentially a pyramid scheme that preys on that less well-versed in finance. Paying you in cash promises you’ll have more money in the end, but it’s all being pocketed by the organizer.

In a Ponzi scheme, the organizer sends most of your money out in initial investment and offers some of it back in interest payments. The scheme will fail if there aren’t enough new recruits to keep the payments coming.

Bitcoin Scams

Scammers will change tactics on you from time to time. Bitcoin scams have become more prevalent over the last two years, as their value skyrocketed. Many savvy investors jumped into Bitcoin for the same reason that many everyday folks did – the promise of big returns in the future.

What is a Pyramid Scheme?

If you’re looking to invest in the world of cryptocurrency, this article might make you nervous. But in reality, a pyramid scheme is a hoax that promises big returns to early investors with no regard for their own or others’ financial situation.

Cryptocurrency businesses that look like a pyramid scheme generally fall under the category of pre-sale or initial coin offerings. These companies raise funds by offering coins, sometimes at high prices or sometimes in exchange for services or products, and then offer the coins at a discount to early investors. In other words, the investors receive more coins than they put in, and the startup takes a percentage of the funds to launch the product or service.

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