Cryptocurrency enthusiasts have been seduced by the potential of large, quick profits, but this allure also brings about fraudulent schemes such as Ponzi and pyramid strategies. Both are named after pioneers of the strategies, Charles Ponzi and the geometrical shape respectively. The key similarity in these duplicitous practices is the reliance on incoming participants’ investment to pay earlier investors, resulting in a lack of transparency.
In a Ponzi scheme, the promised high profits are not from legitimate business profits but from new participants’ investments. The schemes crumble when the influx of investors stumbles, leading to disastrous losses for many. Consider the case of Bernie Madoff who deceived clients with a bogus investment firm, using new investments to pay previous investors. This resulted in enormous losses during the global financial crisis and led to a 150 years prison sentence for Madoff.
The crypto-realm has seen such Ponzi schemes too, with examples like PlusToken and Bitconnect. Deception often lies in the promise of quick riches and high-returns, placing considerable emphasis on referral systems and encouraging investors to move swiftly.
On the other hand, a pyramid scheme is designed in a way that new recruits are expected to bring more participants, creating a hierarchical structure. These schemes are doomed to fail due to the difficulty of maintaining the ever-increasing pyramid, leaving those who entered later in a lurch. Pyramid schemes are quite notorious and are characterised by ambiguous details regarding their return-generation strategies and a strong focus on recruiting over investing in products or services.
OneCoin was a dreaded example of a pyramid scheme in crypto, marketed as a novel digital currency, it lacked transparency and true blockchain capabilities.
Despite the differences, both the schemes lead investors down a fraudulent path promising high rewards, resulting in significant financial losses for most of them. Investors can protect themselves by recognising the difference and being aware of the legal implications of participating in such schemes.
The sophistication of these deceptive practices demonstrates the importance of due diligence and working with entities that are transparent and highly regulated. Therefore, as the saying goes, if it seems too good to be true, it probably is. The need for caution and skepticism cannot be overstated.
Source: Cointelegraph
