Main conclusions

  • Ponzi schemes are common scams that pay off debts to early “investors” with money taken from later “investors,” but there is no real viable business model.

  • Beware of anyone offering unrealistic returns or inviting you to join an exclusive “crypto investment scheme.”

  • Have you fallen victim to a scam? Report the incident immediately to relevant law enforcement authorities and the Binance Support Team.

Learn about cryptocurrency Ponzi schemes and how to avoid and spot them in the latest edition of Your Guide to Spotting Scams.

What is a cryptocurrency Ponzi scheme?

Imagine someone telling you that you can make a fortune in a short period of time with little or no risk, and that all it takes is making a small investment. Also imagine that you were asked to publicize this supposed “opportunity” and communicate it to as many people as possible.

This dynamic is the hallmark of a Ponzi scheme, a common scam that pays off debts to early “investors” with money taken from later “investors.” Ponzi schemes exist in several sectors and can arise in any situations involving investment activities. Unfortunately, these schemes exist in abundance in the world of digital currencies.

In this article, we'll dive into how Ponzi schemes appear in the cryptocurrency space and, more importantly, what you can do to protect yourself from them.

How Ponzi schemes work

In most Ponzi schemes, there is no real "investment" and the vast majority, if not all, of the profits are collected by the scammer. Money is transferred from new victims to previous victims, and this redistribution of funds creates the profitability that keeps the scam going.

So as long as there is a sufficient flow of people, the scam continues, and as soon as the flow of people stops, the scheme reaches its breaking point and collapses.

Below is a summary of the typical progression of a Ponzi scheme, summarized in three steps.

Step 1: Create an attractive Ponzi scheme

The Ponzi scheme is one of the oldest scams, with its origins dating back to the early 1920s with Charles Ponzi, an Italian immigrant in North America who promised investors a 40% return in just three months.

Charles' scam was simple: pay yesterday's investors using money from today's investors and pocket the remaining profits. His promise of 40% attracted victims who did not doubt his intentions, and he was able to raise more than 30,000 from these “investors” in less than six months.

Charles was arrested after the scam eventually collapsed, stripping his "investors" of approximately US$20 million (about US$207 million when adjusted for inflation). In comparison, Bernie Madoff's similarly run company collapsed in 2008, costing his "investors" about US$18 billion. This case is often referred to as the largest Ponzi scheme in history.

Step 2: Reward early investors

Ponzi schemes intentionally pay out promised returns to early investors, who in turn believe the legitimacy of the scheme so much that they tell their friends and convince them to invest.

It is also common today to see Ponzi schemes advertising additional “bonuses” and “bonuses” for those who successfully refer new investors. Some scammers also impose mandatory referrals if "investors" want to continue making money. This method allows scammers to find new victims with minimal effort.

In some cases, scams have such a complex reward structure that “investors” or “employees” must recruit other victims to earn their salaries. Such situations are often known as pyramid schemes.

Step 3: Breakdown

Eventually, the house of cards will collapse.

Gang leaders usually have an escape plan once they reach a certain level of profit or when they feel the fraudulent scheme is about to collapse. On the other hand, while a small number of investors may receive returns, the vast majority are left empty-handed.

In order to help users identify fraudulent Ponzi schemes in the cryptocurrency world, the Binance risk management team prepared this equation after analyzing several real-life cases:

Invitation + promise of unrealistically high returns + guaranteed profit + referral bonuses = Ponzi scheme

Example of a Ponzi scheme in the field of digital currencies

The user, who we will call Lily, participates in a cryptocurrency investment fund that initially generates 10% returns, but according to the scammer, if Lily wants to continue “earning,” she must refer new clients to invest.

The scammer promises Lily a 15% bonus for inviting ten clients. If these new customers keep inviting other people, Lily will get 7% as a 2nd level bonus, and so on.

Here Lily realizes that this is a Ponzi scheme after she falls victim to the scam and loses all her money.

Tips to protect yourself from Ponzi schemes

It can be difficult to spot a Ponzi scheme, but here are some common indicators to look for.

  • Beware of cryptocurrency offers that promise high returns or “schemes” that hold your funds under confusing and undefined terms. As a general reminder, it is always best to conduct thorough research before making any investment decisions.

  • Treat all investment opportunities that promise guaranteed high returns as potential scams. There is often a trade-off between risk and reward, as any investment that promises an attractive return and a 100% guarantee is a highly questionable investment.

  • Treat invitations to join “investment teams” with caution, especially if the advertising returns seem too good to be true.

  • Ask for official paperwork for any cryptocurrency investment “plan” or “scheme.” If an investment strategy is secret or is refused disclosure under the pretext that it is too complex to explain, it is likely a scam.

  • Question how any “investment scheme” can generate returns for its investors, and be wary if it is through a method you have never heard of before.

If you have been scammed by a cryptocurrency Ponzi scheme

If you find yourself the victim of a Ponzi scheme, here are some steps you can take to help mitigate the damage.

  • If you provide sensitive details, change your passwords and freeze your bank account or any other related financial accounts immediately.

  • Report the incident to local law enforcement. Binance works closely with law enforcement authorities, and our cooperation often results in detections and seizures. While getting your money back is not guaranteed, this is the only option available in most cases.

  • Report the case to the moderators of the website, app, or social media platform where the scammer contacted you. Provide these parties with details such as the scammer's profile page and any other information that may help prevent others from being scammed.

  • Be wary of "recovery services". Although some of these services may provide legitimate assistance, many often make false promises or ask for upfront payments. Don't be fooled twice.

We also encourage all users, new and old, to read our anti-scam series to better prepare themselves against common cryptocurrency scams.

  • Your guide to spotting scams: A clear and concise guide to the most common scams in the cryptocurrency space

  • Your guide to spotting scams: How to protect yourself from impersonation scams on Binance

  • Your guide to spotting scams: Fake investments in cryptocurrencies you should beware of

  • Your guide to spotting scams: Protect yourself from fraudulent cryptocurrency gift offers

Disclaimer and Risk Warning: This content is provided to you on an “as is” basis for general information and educational purposes only, without representation or warranty of any kind. The information here should not be construed as financial advice, nor is it intended to recommend the purchase of any specific product or service. Digital asset prices can be volatile. The value of your investment may fall as well as rise and you may not get back the amount invested. You are solely responsible for your investment decisions and Binance is not responsible for any losses you may incur. This is not financial advice. For more information, see our Terms of Use and Risk Warning.