What is a Ponzi scheme?

A Ponzi scheme is a term that comes from the classic financial world, but it has unfortunately also become common in the world of crypto lately. For example, in April 2020, there were 3 Florida crypto traders who set up a Ponzi scheme for $ 35 million. All investors, of course, lost their money. We at cryptotips.eu find it important that our readers always know what to trust and what not. That is why we would like to explain it briefly.

Italian immigrants and stamps

A Ponzi scheme refers to a fraud originally set up by Charles Ponzi, an Italian immigrant who discovered an easy way to make a quick buck. He planned to buy stamps in Europe and resell them in the United States for a profit. Post-war inflation in Europe made this possible. For this he needed money, and he got it from investors who he foresaw incredible profits. The stamp plan failed, but Ponzi had discovered another way that also worked. The first investors had given him (for example) $ 100 each. With the money, he paid the investors $ 20 each a month later, telling them that this was the profit they had made. The investors were, of course, so happy that they convinced all of their relatives and friends to give money to Ponzi too. With that new money he always paid everyone a profit, but actually there was never a profit, he divided the bet.

Ponzi made more and more and the investors thought they were getting richer every month. The truth was, Ponzi has just gotten more investors. His plan was shattered during the 1929 equity crisis when people demanded back their initial investment. Of course not and then everything came out.

Bernard Madoff

Since then, many businessmen have mimicked his Ponzi scheme, but no one could ever match New York businessman Bernard Madoff, who could steal more than $ 15 billion from very rich and famous Americans in this way. Of course, he paid most of that back to the investors as profit, but with several hundred million he financed his own very lavish lifestyle. Madoff had had a guaranteed return of 15% a year on Wall Street for years and was a legend.

During the 2008 credit crunch, customers took back about $ 7 billion from him as their classic investments evaporated. Of course he did not have that amount. Thanks to the many connections of his clients who felt cheated, he was sentenced to hundreds of years in prison. The Madoff case is so well known that a television series and a movie have been made about it. Robert de Niro played Madoff and Michelle Pfeiffer's wife.

Wolf of Wall Street Predicts Crypto Ponzi Schemes

Unfortunately, more and more rogue businessmen have since used the Ponzi scheme to rip people off, including in the crypto world. The man who was the real Wolf of Wall Street, Jordan Belfort, warned this in a 2017 interview on CNN. He then said that due to the success of crypto, many people would get stuck with both pump and dump and Ponzi schemes and therefore needed regulation as soon as possible. Morten Bech of the Bank of International Settlements (BIS) also shares the same opinion. In fact, he said Bitcoin is still a Ponzi scheme at this point because of the power of the so-called whales who can control everything if they want to. He explained this in a Ted Talk.

  • At the moment, the crypto market is not yet regulated.

How do you recognize a Ponzi scheme?

In general, when something is too good to be true, it often is. A well-known Ponzi scheme in the crypto world was the Bitconnect platform. Here you can lock your investment for x number of days and receive daily returns. Daily returns were sometimes higher than 1%, which attracted many investors. The company said it had developed its own trading bot, which traded on the volatility of Bitcoin. Bitconnect had its own token, which had to be bought and then loaned to the platform. You have received your return in dollars and that can be converted into Bitconnect tokens. In 2018, Bitconnect announced that it would immediately stop lending Bitconnect tokens, causing thousands of victims to lose their funds. The Bitconnect token fell from $ 400 each to a few cents and everyone got their investment back in BCC tokens. As a result, everyone lost their money and Bitconnect ran away with all Bitcoin. So if a high return is promised, you can assume that it is a scam.