Ponzi Scheme

A fraudulent investment involving the payment of purported returns to existing investors from funds contributed by new investors.

A Ponzi scheme is a financial fraud under the pretext of an investment opportunity with high returns. The name dates back to the 1920s financial fraudster, Charles Ponzi, who swindled investors out of millions with a fraudulent investment opportunity.

In a Ponzi scheme, early investors are paid with the investments of later investors to keep the scheme going. However, the money is never invested in the promised way, and the system relies on a constant stream of new investors to keep the charade going. Before a Ponzi scheme collapses, some warning signs become visible, like slower processing of withdrawals and missing funds.

Ponzi schemes in crypto often leverage investors’ FOMO by promising exceptional returns at very little risk. Since cryptocurrencies are still poorly understood by many investors, these schemes can easily disguise frauds as legitimate investments. Crypto projects often lack third-party audits and detailed information, and many founders choose to remain anonymous. This greatly facilitates Ponzi schemes.

Most crypto Ponzi schemes present a solution to a problem that doesn’t exist or exaggerate the solution provided. They always rely on an influx of new investors to pay out old investors. They are, therefore, distinct from vaporware, which does not necessarily promise outsized investment returns, although investors hope they multiply their stakes.

Some cryptocurrency Ponzi schemes can be easily identified. Others are more difficult to uncover. There are a few telltale signs investors should look out for:

Back to Glossary Index Page