How to Spot a Ponzi Scheme: 10 Red Flags to Check For

Ponzi schemes pop up every now and then with the same goal: to separate people from their money. It really sucks to become a victim of these scams. Luckily, there are ways to know when the latest investment plan you found is actually a Ponzi scheme in disguise. But first, let’s take a dive into these schemes and why they happen.

What is a Ponzi Scheme?

A Ponzi scheme is a type of investment fraud where old investors are paid with the money brought in by new investors. Imagine a business that tells people they can double their money within a short period. All they have to do is invest “x” amount of money in the business and wait. But they don’t provide a real service and have no assets. So if you invest, you’re not putting your money into anything real. 

This cycle continues until the Ponzi organizers can’t bring in new investors. That’s when they run away with investors’ money and the entire scheme crashes.

How Did Ponzi Schemes Start?

Ponzi schemes are named after an Italian fraudster, Charles Ponzi, who used a fake postal stamp scheme to defraud people of $20 million. Since then, these schemes have become more popular.

There are different types of Ponzi schemes, but they all have these 3 things in common:

  • Investors are promised high and risk-free returns. 
  • Investors are promised profits within a short time frame. 
  • The business model is hard to understand.

Now that you understand Ponzi schemes, let’s move on to crypto Ponzi schemes and how they work. 

How do Crypto Ponzi Schemes Work?

Crypto Ponzi schemes work exactly the same way traditional Ponzi schemes work. But instead of investing in traditional businesses, people invest in fake crypto business models. 

In Crypto Ponzi schemes, fraudsters take advantage of how people don’t really understand cryptocurrencies and the blockchain. They also promise investors high returns if they invest in a particular cryptocurrency that’s “the next Bitcoin”.  

Like traditional Ponzi schemes, crypto Ponzi schemes also depend on money from new investors. 

Are Ponzi Schemes Popular in the Crypto Community? 

Onecoin is an example of a popular crypto Ponzi scheme that ran from 2014-2016. It rewarded its investors based on the number of materials they sold and number of people they registered.

Investors were also rewarded with the Onecoin cryptocurrency, which seemed valuable at the time.  

Onecoin did not have its own blockchain and people could only trade the coin on the Onecoin exchange. Also, the amount of Onecoin you could sell on the exchange depended on your “package level”. This didn’t seem odd until different countries raised alarms about how the company operated. The founder, Ruja Ignatova, fled and investors lost more than $5 billion in the scheme. 

The Onecoin controversy is just one out of the many Ponzi-type schemes that exist. That’s why it’s important to know how to spot and avoid them. 


READ MORE: How to Protect Yourself From Phishing Attacks

How to Spot a Crypto Ponzi Scheme

While carrying out your research, here are 10 red flags you need to look out for: 

1. High Returns with Little or No Risk

Risk is used to measure the chances of an investment failing or succeeding. All types of investments have risks. It’s Impossible to invest in any asset, especially cryptocurrencies, without any risk involved.   

In fact, investments that promise higher yields are riskier. It’s also important to note that not all investments yield returns. You should be wary when you come across a crypto project that promises high returns with little risk. 

2. Guaranteed Returns

Crypto Ponzi schemes use “guaranteed returns” to convince you to invest in their offer. But nothing in the investment world is guaranteed. What if a meteor falls from the sky? Won’t the prices of cryptocurrencies and other assets drop? 

Okay, so we may have exaggerated a bit. But, the point is that it’s not possible to accurately predict how the market will behave all the time, especially crypto markets. For example, a tweet from an influential person can cause the price of a coin to drop or increase. Any crypto project that guarantees profits is a red flag you should flee from. 

3. Consistent High Performance

This may shock you, but an investment that always returns high profits is a red flag. The crypto market is volatile and prices are never stable. 

That’s why you should be wary of crypto profits that never fluctuate even when the markets are bad. There is a high chance they are paying investors using the money from new investors. 

4. Unregistered Investments

Investment platforms are supposed to be registered with state or country government regulatory bodies. You should take any unregistered crypto investment with a pinch of salt. It’s definitely a red flag. 

5. A Fishy Website

Everyone is now online and most businesses understand the importance of having an online presence. It’s a major red flag if the crypto project doesn’t have a basic website. It’s also a red flag if the website has grammatical errors, spammy ads, and very little information.

6. Little Information on How Money is Generated

Remember when we said Ponzi schemes have business models that are hard to understand? This is usually done on purpose to confuse people. The organizers use big words and statistics to convince people it’s a legitimate investment. 

If you don’t understand how the business works or gives you returns, run. 9/10 it’s a scam you don’t want to be part of. 

7. Anonymous Founders

If you don’t know who the founders of a project are, then it’s not the best idea to invest in that project. A good way to find out about the founders is by reading the project’s website, its whitepaper, and using social media to see what the founders are up to. 

8. A Pyramid Structure 

Before we explain this, it’s important to know how pyramid schemes work. Pyramid schemes promise investors high returns only if they bring in new investors. Let’s use a newbie investor named Ola to explain how pyramid schemes work. 

Ola hears about an investment opportunity that is “guaranteed” to double her money. All she needs to do is register 2 of her friends. Her two friends register, but that’s just the beginning. To get their profit, Ola’s friends also need to register new people. This cycle continues until investors can’t find new people. 

Any investment that says you MUST “bring people” to get your profit or money back is a pyramid scheme. You shouldn’t have to register your entire family to enjoy an investment opportunity. 

9. Pressure to Invest

Carrying out your own research before investing is important. Research helps you find out if the investment is real or not. But good research takes time. If you are pressured to invest without carrying out your own research, it’s probably a scam. 

Also, be careful of projects that don’t allow you to completely withdraw your money. Remember, crypto ponzi schemes need members’ money to keep operating. You should always be careful if: 

  • It’s very difficult to liquidate your coins and withdraw your money. 
  • The investors promise you higher returns when you try to liquidate your coins. 

10. Urgency

Ponzi schemes prey on people’s emotions. They make people believe they are going to miss a life-changing opportunity if they don’t invest immediately. 

The success of an investment doesn’t depend on investors acting around a certain timeframe. You should walk away from any Crypto project that says you will miss out if you don’t invest immediately. 

Crypto schemes may be hard to spot, but increasing your knowledge of cryptocurrencies and how they work will protect you from falling for such schemes. Remember to always do your own research and keep an eye out for the 10 red flags we mentioned.

Final Thoughts

There are so many amazing ways to make money, especially from crypto, like buying Bitcoin or trading. But a Ponzi scheme is not one of those ways. So look out for the red flags we mentioned above.

More importantly, if you’re looking to get started in crypto, do a lot of research about what you’re buying into. Also, make sure that you use a reliable exchange platform that you can trust. Here at Quidax, we offer a free crypto academy course to get you started. This way, you can have a basic knowledge of crypto and hit the ground running when you sign up on Quidax


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