In all societies and financial markets some people try to steal people’s assets by deceiving them. These people encourage people to invest and entrust their funds to them with promises such as making easy money or receiving large profits on small investments. One of these old fraud methods that is increasing again today is the Ponzi Scheme. Ponzi fraud is not limited to a specific market such as the digital currency market. Still, today most of these fraudsters try to implement their plans by promising to invest in digital currency, we will discuss this fraud method and examples in this article from Eviralnews. let’s get acquainted If you would like to know what a Ponzi scheme or Ponzi scam is, how to recognize a Ponzi scheme, and what the difference is between a Ponzi scheme and a pyramid scheme, then follow this article.
What is a Ponzi Scheme?
A Ponzi scheme is a type of financial fraud that lures investors with promises of profits or high returns, but instead of making legitimate profits, uses capital from new investors to pay dividends to previous investors. The whole scheme is based on deception and eventually collapses when there are not enough new investors to pay the previous investors, resulting in significant financial losses for those involved. In fact, as long as new investors come in, this plan can continue. The devastating consequences of Ponzi schemes are not only limited to retail investors who lose their savings, but also affect the overall trust of people in the financial markets. Ponzi is not only limited to digital currency scams and is run with promises of investment in various fields. Investors should be cautious and do their due diligence before entrusting their capital to others and be aware of the warning signs to avoid falling victim to this scam.
History of the Ponzi Scam
The Ponzi scheme is named after Charles Ponzi, an Italian immigrant who conducted one of the most famous early Ponzi schemes in the United States in the early 20th century. However, long before the term “Ponzi scheme” was coined, various individuals and groups throughout history have used this method to defraud and deceive people. The first traces of this scheme can be found in the mid-to-late 1800s in America, and even Charles Dickens, the famous English writer, described similar methods of fraud in his novels.
Ponzi carried out his first fraud scheme in 1919. He founded a company called Securities Exchange Company and promised investors that by buying shares of this company, he would pay 50% profit in 45 days and 100% profit in 90 days. Because he had already run a successful postage stamp scheme, investors welcomed his promises. But instead of actually investing their assets in a business, the Ponzi spread them out as profits to the investors. He continued the same routine and in the first 8 months of 1920, he was able to collect $15 million (equivalent to $220 million in 2022).
The growth of Ponzi’s capital made his name become the first headline of the “Boston Post” newspaper. This led to an investigation into the Ponzi company. As a result of these investigations, Ponzi’s media image was destroyed and the number of new investors dropped drastically. As a result, Ponzi was no longer able to pay the promised profits and was eventually sentenced to 3.5 years in prison by the federal police for fraud. As soon as he was released, he was convicted on government charges, went to prison again and was released from prison in 1934. Finally Panzi returned to Italy and died in a hospital in Brazil in 1949.
The main features of a Ponzi scheme
As mentioned, the Ponzi scheme is not limited to a specific market and is implemented by promising to invest in different markets. However, Ponzi schemes have some common characteristics that, being aware of, will allow you to recognize the scheme as a scam as soon as you see it. Among the main features of a Ponzi scheme are the following:
- The promise of huge profits without risk
- Lack of legitimate investment
- Lack of transparency about the investment strategy
- Pressure to invest quickly
- Dependence on attracting new investors
- Not having a proven investment history
- Difficulties accessing invested funds
- Rapid and unsustainable growth
The promise of huge profits without risk
The operator of a Ponzi scheme usually lures investors with the promise of extraordinarily high profits, often higher than the average market rate. Usually, people who don’t know much about the mechanism of financial markets believe these numbers and are encouraged to invest. High profits in short periods of time is one of the most important warning signs that should be suspected of being a Ponzi project.
Lack of legitimate investment
The fraudster behind the Ponzi scheme does not engage in any legitimate or profitable investment activities after collecting people’s funds. There is no business, product or service in the background that delivers the promised profit. Instead, the fraudulent person or company pays out dividends from new investors’ capital, creating a false appearance of profitability.
Lack of transparency about the investment strategy
Ponzi scheme operators usually do not make their investment strategy clear. The explanations of these people are usually general and vague and they never provide a verifiable and valid document of the investments made. Of course, in some cases, fraudsters try to show a legitimate face of their business by registering fake paper companies and obtaining apparently valid certificates and licenses.
Pressure to invest quickly
Since the life of a Ponzi scheme depends on new capital, the operators of these schemes try to encourage investors to invest as quickly as possible. For example, they may claim that investment opportunities are limited and that investors should act quickly to secure a position. This rush causes people to be tempted and do not have enough time to check and verify the fraudsters’ claims.
Dependence on attracting new investors
The entire structure of a Ponzi scheme depends on the constant attraction of new investors. The funds of these new investors are used to pay interest to previous investors. The scheme needs a steady inflow of fresh capital to maintain the illusion of profitability among investors. For this reason, in many cases, people are promised that if they introduce new people as a sub-category, they will be paid more commission or profit.
Not having a proven investment history
Operators of Ponzi schemes usually do not have a legitimate or successful investment history. These people often lack credit, license or any valid record, and the documents they provide are either fake or not valid. Usually, with a little search and examination of the documents, you can find out the formality of the companies and the documents of these people. For example, if the project is in the field of digital currencies, checking the white paper can help to identify whether the project is fake or legitimate.
Difficulties accessing invested funds
Another feature of Ponzi scheme is that if investors want to withdraw their entire capital, they face various challenges and excuses. Investors of reputable companies and schemes can withdraw their capital whenever they want, but Ponzi scheme operators usually try to dissuade people from withdrawing their capital by promising more.
Rapid and unsustainable growth
Ponzi schemes usually grow quickly because of the promise of high profits, and high growth requires the entry of large numbers of new investors. Since the number of new investors is limited, the executor cannot raise enough capital to pay dividends. In such a situation, the plan falls apart and many investors lose their money. Eventually, the executor may disappear or be caught by the law for fraudulent activities.
Detection of Ponzi schemes
Now that we are familiar with the features of Ponzi scheme, you may have a question about how to recognize Ponzi projects. The simple answer to this question is awareness and information. If you keep the mentioned features in mind, if you come across a Ponzi scheme, you can easily recognize that it is a fraud. There is no type of investment or project that can give you huge profits in a short period of time, so if you come across a project or a plan whose proposed profits are much higher than usual, doubt its authenticity.
Ponzi scheme operators usually take advantage of people’s ignorance and trap people by naming new concepts such as buying digital currency and trading with artificial intelligence, cloud mining, smart trading robot, etc. Also, beware of fake documents and websites. Having an English website and numerous unknown certificates is not proof of the company’s credibility and should not be used as a criterion. Reputable companies usually have a transparent mechanism, and the way to invest and receive profits in them is completely clear and defined in advance.
Examples of Ponzi projects
Throughout history, there have been various Ponzi schemes. Among the most famous Ponzi projects, we can mention the following:
Lou Pearlman’s Ponzi Project
Lou Perlman is one of the American fraudsters who was accused of running one of the largest and longest Ponzi schemes in America in 2006. In the 1990s, Perlman had a history of starting several different music groups. After the same groups sued Perelman for theft, he was also accused of running a Ponzi scheme with $300 million in debt. He was able to receive this 300 million dollars from various investors and banks by registering paper companies. Perlman was arrested in Indonesia in 2007 on charges such as collusion, money laundering and publishing lies, and in 2008 he was sentenced to 25 years in federal prison. He finally died in 2016 at the age of 62.
Bernie Madoff’s Ponzi Project
Bernie Madoff started his career as a stockbroker in the 1960s. But by the early 1980s, his company became one of the largest Ponzi schemes in history. Like other Ponzi schemes, Midoff lured investors with promises of high profits and low risk. There was no business and profit generation behind the story, and Midaf used their money to pay profits to his previous investors. In addition, Midaf received a fee called “Payment for Order Flow” (PFOF) for arranging financial transactions between these individuals and investment firms and thus earned income. However, since these companies were all fake (or actually his previous investors), the fee was like the investors paying more money for the investment and the difference going into Midoff’s pocket. Midoff’s scheme collapsed in 2009, and his Ponzi scheme cost more than 13,000 investors between $65 billion and $74 billion. Midoff was sentenced to 150 years in prison for this fraud and died in prison in 2021.
DC Solar Ponzi Project
The Ponzi project of DC Solar, which operated in the field of clean energy and solar panels, attracted famous companies such as Warren Buffett’s Berkshire Hathaway Insurance Company, Sherwin-Williams Paint Company, and many world-famous investors. Trapped. A mechanic from California named Jeff Carpoff was able to invent a portable generator to produce clean energy by installing a large battery and several solar panels on a trailer. He named his invention Solar Eclipse and started a company called DC Solar. Many large corporations, sports and entertainment companies, and even the US government welcomed the company, but his company had trouble keeping orders and the generators sold were not working well. In 2012, Karpaf decided to turn the project into a Ponzi scheme to solve the problems. In addition to using new funds to pay off debts to previous investors, he was able to deceive the US government by registering his company as a clean energy company and escape from the burden of millions of dollars in taxes. Between 2018 and 2020, American authorities exposed the plan and arrested Karpoff along with many of his company’s executives. Karpaf’s scheme brought a total of about one billion dollars in damages, and because of this, he was sentenced to 30 years in prison in 2021.
George Santos’ Ponzi Project
In July 2020, Republican Congressman George Santos was hired to work at an investment firm in Florida called Harbor City Capital. During his tenure at the company, he encouraged investors to invest in digital advertising companies by offering high-yield, low-risk investments (an important warning sign for financial scams). To make his offers more attractive, Santos would exaggerate his education and claim to be associated with rich or powerful people. Finally, one of the people who wanted to invest found out that the company was using fake financial documents and raised the issue with Santos. Santos also discussed the issue with one of the company’s lawyers, but did not take any other action. In April 2021, the Securities and Exchange Commission (SEC) froze the assets of Harbor City Capital. The commission accused the company of embezzling about 4.5 million dollars of investors’ money for the CEO’s personal use. The company was also accused of transferring investors’ money to entities unrelated to the promised investments, a hallmark of Ponzi schemes. Of course, Santos’ name is not mentioned in this case and he claims that he was unaware of the fraud.
Ponzi Projects of Digital Currency
Today, with the boom of digital currencies, more Ponzi schemes are carried out in this area. So far, various projects have been implemented with the Ponzi scheme, among the most famous of which the following can be mentioned:
OneCoin Ponzi Project
OneCoin is one of the longest-running Ponzi schemes in the digital currency industry, which was run by a Bulgarian fraudster named Ruja Ignatova, nicknamed the Cryptoqueen. Between 2014 and 2019, OneCoin managed to attract 5.8 billion dollars from various investors by introducing itself as “Bitcoin killer. There was no company or business behind the story, and like other Ponzi schemes, the money of new investors was paid to previous members in the form of cash and OneCoin currency. OneCoin did not have its own blockchain and in fact the investors had bought a worthless coin. Finally, this plan collapsed with the intervention of the American government and its executives were arrested.
PlusToken Ponzi Project
PlusToken is one of the biggest Ponzi schemes in the world of digital currency, which did most of its marketing campaigns through the Chinese messenger WeChat. In this Ponzi scheme, investors were promised monthly profits of 10 to 30 percent. Plus Token was able to attract more than 3 million investors, most of them from China, South Korea and Japan. The main focus of the project was cryptocurrency tutorials and a cryptocurrency wallet service, and the fraudsters were able to persuade investors to buy tokens from the Plus Token project to increase their earnings. This fraud team was able to collect more than 3 billion dollars from investors until 2019. With the collapse of the project, several of its main members were arrested, but it seems that some of the people involved remain unaccounted for.
Bitconnect Ponzi Project
In 2016, a project named Bitconnect (Bitconnect) was launched as a solution for lending Bitcoin, which promised a monthly return of 40%. The Ponzi scheme was run by anonymous developers working for someone named Satao Nakamoto (which is obviously a pseudonym). Investors in this project had to buy BitConnect tokens called BCC, lock them in the platform and wait for trading robots to start buying and selling using this capital. Vitalik Buterin, one of the creators of Ethereum, was among those who spoke about the unsustainability of BitConnect’s promised profits. Within a short time, the attention of the British government was drawn to the project, and finally the American government officials declared the project a Ponzi scheme. In 2018, the activities of this project were stopped and the 90% fall in the price of BCC caused investors to lose a total of 3.5 billion dollars.
The Difference Between a Ponzi scheme and a Pyramid scheme
Pyramid schemes are one of the types of financial fraud methods that are usually equated with Ponzi, but there are differences between these two types of fraud. In a Ponzi scheme, investors usually invest once and then wait for a profit. A Ponzi scheme usually requires one person or a small group (i.e., the scheme operators) to attract new investors and pay dividends to previous members. But pyramid scheme or projects constantly encourage investors to actively participate and introduce new members. In pyramid schemes, people usually get a commission from his membership fee for each new member they introduce to the network. A part of this money is also paid to the previous investors and the main leaders of the project. In fact, in a pyramid project, people must constantly introduce more people as sub-categories to earn money. Pyramid companies usually have a legitimate appearance, but in most cases, no specific business is conducted in them. In short, the difference between a Ponzi and a pyramid scheme can be stated as follows:
- In a Ponzi scheme, the operators of the scheme defraud investors of a lump sum and then pay them interest on the money of new investors.
- In a pyramid scheme, scheme operators take small amounts of capital from investors and then encourage them to make money by introducing new members. A part of the money of new investors is paid to the previous investors and the main leaders of the project.
Coinclusion
Ponzi scheme is not a new concept in the financial markets, but today with the boom of digital currencies, the number of these schemes is increasing again. Ponzi scammers usually take advantage of people’s ignorance and greed and deceive them with the promise of huge profits and no risk. Financial markets always work on the basis of supply and demand, and large and permanent profits without sufficient knowledge and capital do not make sense in them. Ponzi schemes usually try to present themselves as legitimate and profitable companies by providing false financial documents. By abusing people’s greed, these schemes encourage them to invest hastily and take away the opportunity to investigate the company and the project. When you encounter a tempting investment opportunity, first check the status of the project, the history of the company and its leaders, so as not to fall into the trap of fraudsters. Big and guaranteed profit is one of the most important warning signs in Ponzi schemes, and if you encounter it, doubt the authenticity of the project and the company.
Frequently Asked Questions (FAQ)
What is a Ponzi scheme?
Ponzi projects are projects in which a person or group receives money from investors with the promise of paying high profits without risk. But instead of spending these amounts on business and generating real profit, they use it to pay profit to previous people.
Do all Ponzi schemes fail?
Since the number of new investors and their capital is limited, these projects are doomed to collapse. Usually, when the collected funds reach a good level, the project managers run away with the entire capital. Since all companies and financial documents are fake, it will be very difficult to sue and investors may never get their money back.
Is a Ponzi scheme the same as a pyramid?
Ponzi and pyramid schemes, despite their similarities, are different from each other. In pyramid schemes, people can enter with lower amounts and in order to earn money, they have to introduce new people as affiliates and get a commission in return. A part of the amount of new investors is also paid to the higher level people of the group and the leaders of the project.
Who is Ponzi?
Charles Ponzi was an Italian immigrant who managed to defraud many investors through his company called Securities Exchange in the early 20th century. He attracted a lot of funds with the promise of high profits and a guarantee in the short term, and with the same capital, he paid interest to the previous people. That’s why later this fraud method was called Ponzi.
Why do people fall for Ponzi schemes?
Ponzi scheme operators usually take advantage of people’s ignorance and greed. Usually, in most of these projects, people’s interest is paid regularly for several months. This issue causes more trust and bringing more capital into the project. Knowing about the characteristics of a Ponzi scheme and doing enough research before investing can minimize the chances of getting caught.
