A Ponzi scheme is a type of fraud in which the fraudster promises investors high returns in a short period of time, paying early investors from the money taken from new investors. This creates the appearance of profitability and attracts new investors who invest more money into the scheme.
Thus, Ponzi schemes are based on the redistribution of funds among participants, which cannot be sustainable or long-term and is doomed to fail.
How Ponzi schemes emerge:
Creating an attractive scheme:
Ponzi schemes can be traced back to the 1920s, when Charles Ponzi promised investors a high return of 40% in just three months. His scheme was simple: he paid early investors their profits from the money received from new investors and kept the remaining profits for himself.
Rewarding early investors:
In Ponzi schemes, early investors are deliberately paid the promised returns to make them attract new investors and to make sure they believe in the legitimacy of the scheme, which actually has no real profitability. This creates an illusion of success and maintains the influx of new money into the scheme.
Collapse:
Usually, Ponzi scheme leaders have already come up with an escape plan once they reach a certain level of income, or when they notice that the scheme is starting to collapse.
Although some investors may get their money back, the majority of defrauded investors will be left without their investments.
How to protect yourself from Ponzi schemes:
• Be cautious when considering high-yield crypto-offers or "schemes" that require locking your money under complex or arbitrary conditions.
• High-yield and 100% guaranteed investments can be extremely suspicious as there is a balance between risk and return.
• Request official documents for any crypto investment "scheme" or "plan." If the investment strategy is confidential or dismissed as too complex to explain, it may be a fraud.
What to do if you become a victim of a crypto-Ponzi scheme:
• Immediately change passwords and freeze your bank or any other account if you have provided personal information to scammers.
• Contact local law enforcement and report the incident.
• Report the case to the moderators of the website, application or social platform through which the fraudster contacted you. Provide them with data such as the scammer's profile name and any other information that can help prevent fraud.
• Beware of "recovery services". Some of them may offer legitimate assistance, but many require upfront payments and can turn out to be fraudulent.
Investing is a complex process, and it is important to be cautious when choosing an investment strategy and managing your risks. Ponzi schemes are not a way to make money, but merely a way to deceive trusting investors.