Common Distribution Channels
Report Your Incident
Help us to help the community. Report your incident to us if you are the victim of a crypto scam
Commonality: Fairly common
Easiness To Spot: Fairly Easy
Don’t get caught off-guard.
Subscribe to get crypto scam alerts.
How does a Ponzi Scheme Work?
All Ponzi schemes will fail because it is not a sustainable business model. A Ponzi scheme requires a constant and increasing flow of new money to be able to keep up with the payout.
As soon as the new member sign-ups slows down, or if a significant percentage of investors want to cash out at the same time, the scheme collapses, and everyone will lose their money, except for the organizer.
Ponzi schemes are a form of High Yield Investment Program (HYIP) scams. It often promises way above market average returns (high yield investments) that are unrealistic to achieve, in an attempt to attract investors.
To identify a Ponzi scheme, there are 4 identifying characteristics you should be on the lookout for. If the crypto investment program you are thinking of participating in checks a few of the below bullet points, do not invest.
Unrealistic Rate Of Return
In many cryptocurrency Ponzi schemes, the investment company will promise an unrealistic rate of return such as 30-50% annually to investors. This return is often also advertised as “guaranteed”.
Mr. Franklin was right. Nothing is “GUARANTEED”, especially in the world of investing. If any investment advertises themselves as giving guaranteed returns, you should run away immediately. ALL investments carry risks.
You Have No Idea What The Company Does
Ponzi scheme organizers have no interest in running a legitimate business. If you ask them exactly what they do to generate such aggressive and above market returns, they will have no logical answers, nor can they provide shreds of evidence.
Legitimate businesses have sound business models that generate reasonable returns. Illegitimate businesses have vague business models that do not explain how they generate the high returns.
Increasing Demand For Capital
The only way for a Ponzi scheme to pay out is by attracting new investments from new and existing members. Thus in order to keep the scheme going for as long as possible, many programs will often only ask for a small amount of investment first to reel in the potential victims. They will distribute some small initial profits to earn investors’ trust and then demand more capital input.
Victims often find the initial returns encouraging. Subsequently, they are willing to invest much more money into the scheme. However, when the time comes for a big withdrawal, the investors realize they cannot withdraw the advertised profits.
Some programs will even show you that they have initiated withdrawals with screenshots as proof. Unfortunately, those pictures are fake, and you will not get your money back.
Beware Of Crypto Flavored Ponzi Scheme:
Mining scams is a type of crypto specific scam that has cashed out a huge amount of money in the recent years that is really worth a mention. There have been few sites such as Sierra Hash and Auroramine that were able to deceive investors out of millions of dollars in a matter of weeks before they vanished into thin air.
These mining scams operate in a similar fashion as Ponzi schemes as they often offer guaranteed profits and pay off some early adopters with new members’ investment at first.
These programs are not mining coins and their organizers never planned on mining coins. When the mining group grows to a certain size, the site disappears, and so does your money.
Please be very very careful when evaluating investing in mining rigs. Keep in mind that with the market growth in the past years, you will likely make it out better just by buying your tokens at exchanges and holding on to them for an extended period of time.
Mining Ponzi Scam Case Study: Sierra Hash
The speed SierraHash Mining has accumulated investment deposits is impressive. More than 86,000 transactions happened since November 16th, 2017. In total, Sierra Hash received 177 BTC in just 21 days according to the report from bitcoinwhoswho. That translates to more than $2.5 million dollars with BTC price in December 2017.
The structure of the scam is nothing out of the ordinary. It promised an insanely high (and thus impossible) annual return of over 3,700%. In comparison, other legitimate mining sites’ average annual gains are somewhere between 25% and 30%.
A crazy rate of return should be the first sign that Sierra Hash is a Ponzi scheme. Other Ponzi-telling signs of SierraHash are the length of the site history (the site’s total uptime was less than 1 month old), and the lack of evidence of real business activities. The program’s sole purpose is to promote heavily and cash out with naive investors’ early deposits.
We strongly recommend against newcomers with little knowledge of how blockchain works to invest in mining operations. But if you are experienced, and are truly interested in cryptocurrency mining, there are few third party resources where you can look up to see the ratings, reviews and scam report for mining sites.