Certainly, similar scams existed in antiquity, but the most famous case occurred 100 years ago. The Ponzi scheme was named after an American businessman of Italian descent who operated his scam in the first half of the century. Charles Ponzi noticed that international reply coupons can be bought at a lower price in Europe and sold for more in the United States. Initially, it was a legitimate arbitrage deal, but later the business was deformed, so to speak. For customers, 50% profit in 45 days and 100% profit in 90 days seemed like a too good offer, which would have been a shame to miss. To hear the wonderful opportunity, more and more investors came up with open wallets.
The Ponzi scheme is a special type of scam that consists of encouraging investors to participate with the promise of high returns and then paying out the “profits” of those already inside from the contributions of new entrants. Participants believe the returns come from successful trading, even though the fraud would collapse without the constant replenishment of victims. The result is similar if too many people want to take out their investment at once.
A respected financial journalist, Clarence Barron, calculated that at least 160 million coupons would have to be in circulation to satisfy every investor. However, the actual number of coupons was only 27,000. The United States Post Office has confirmed that no coupon purchases of this size have been made anywhere in the world. Ponzi’s idea was not scalable, but customers still got the payouts, at least for a while.
Like all similar scams, it later suffocated and many investors went bankrupt. In one year, the loss was up to $20 million in 1920. In order to avoid life imprisonment, he pleaded guilty and was sentenced to 5 years in prison. He could be released after 3 and a half years. As he came out of jail, he was again charged with theft. At the trial, Ponzi had to be his own defense attorney. He defended himself so charismatically that the jury could not make a decision and it had to be dissolved. At the third trial, his luck was gone and he was again found guilty and sentenced to 7 years in prison.
It is eloquent proof of human irrationality that Ponzi also received offers from investors in prison to invest their money. In 1925, he was released on bail and went to Florida to launch another scam. The new offer was a 200% profit in 60 days. Of course, the routine fraudster once again faced justice. He was arrested after an unsuccessful escape to Italy. After neither the President of the United States nor Benito Mussolini heard his plea, he was again sentenced to 7 years in prison. He spent his last years in poverty in Brazil and died here on January 18, 1949.
The name is still well known after 100 years
More than 100 years have passed since the infamous scam, yet investors fall victim to similar schemes every day. The largest ended in 2008, when Bernie Madoff was charged with fraud and money laundering, among other crimes.
According to an article by Business Insider, Madoff has been able to continue his business unnoticed for decades and has harmed its investors by more than $65 billion. He had a reputation as an experienced and respected financier, so they didn’t even suspect fraud for a long time.
However, investors wanted to take out $ 7 billion at a time, which was not invested in any liquid able asset therefore, Bernie Madoff failed.
Unfortunately, the currently growing cryptocurrency industry is not without Ponzi schemes either. Smart contracts that can be created using the Ethereum blockchain have opened the door to initial coin offerings. The ICO is a type of Crowdfunding that - due to its novelty - is not sufficiently regulated and has become a hotbed of Ponzi schemes. In the crypto community’s popular social applications, such as Telegram or even on Facebook, the legitimate service providers became a minority. Bonafide businesses also face extreme distrust as a result of natural skepticism about scams.
The fact that almost all of the retail investors have already encountered a Ponzi scheme or even became a victim is awful. What can a crypto investor who wants to find the right place for his savings does?
What are the tell-tale signs?
Returns without any risk
There is virtually no risk-free investment in the world. Even the safest government bonds can devalue, or the state can become insolvent. Nevertheless, these are still the safest investments. At the same time, low risk is accompanied by low returns. An irrational, 200% risk-free, guaranteed return per month is certainly not true.
Overly consistent results
A stable 15% yield every day if it’s too good to be true, it is. Due to the nature of the market, there is a random element in its movements that makes it impossible to perform just as well every day.
How to defend ourselves?
We are looking for rational returns. There are high-yield investments out there, but they usually involve more risk. Future performance is always uncertain, but past results provide a good starting point. Let us look at the past performance of the strategy, ask for a detailed investment report on the actual trades of previous months. If anyone is reluctant to provide these, beware!
Contact the company providing the service, look at the profiles of the team, what relevant experience and real expertise they have. Do not fall into the stories of incredible investor talents. The real profit is generated by the struggling investor veterans who have gained prominent experience throughout their careers. Here we can say that Madoff was also a reputable investor, yet how his career has ended. This is true, but it should not be forgotten that it is exceedingly rare for such people to run a Ponzi scheme. Nor is it a coincidence that Madoff was able to attract an investment of this size. The exception here reinforces the rule.
Bonus points if we can invest without transferring anything!
It may seem contradictory at first. Isn’t that what investing is about? B-cube.ai is a French fintech start-up whose merchant bots trade on their own account. Although the users must have their own wallet for trading at the Bitmex Exchange, the capital does not need to be transferred anywhere. Through the B-cube website, we can integrate the trading bot into our account. As a result, the Bot is only allowed to trade, no transfer is possible. Thanks to this solution, the investor can see at any time how the investment is performing.
If so, we see a fair investment report on past performance. Also, a correct team of experts operates the system. Moreover, we can exercise constant control over our capital. Then we will be able to make profitable investments in the world of cryptocurrencies. No matter how flooded the ocean of possibilities with unscrupulous scammers!
DISCLAIMER
Trading cryptocurrencies involves risk. The information provided on this website does not constitute investment advice, financial advice, trading advice, or any other sort of advice and you should not treat any of the article’s content as such. Author, website or the company associated with them does not recommend that any cryptocurrency should be bought, sold, or held by you. Do conduct your own due diligence and consult your financial advisor before making any investment decisions. Lastly, this article is not targeted at French citizens or residents.