What is ponzi fraud and how do you protect yourself from it?

For more than a hundred years, we have known about ponzi fraud. Since the rise of cryptocurrency, we are also seeing this form of fraud take on new forms more and more often. Within the crypto market, we unfortunately encounter victims of ponzi fraud all too often. It is difficult to recognize ponzi fraud, and often the perpetrators do not realize that they are doing something that is illegal. Indeed, ponzi fraud is illegal and you can be prosecuted for it.

We sometimes call ponzi fraud a ponzi scheme. In this type of fraud, people are given the opportunity to invest in something. They are almost always promised a fixed return on their investment, which makes it attractive to invest. In addition, participants can earn extra money by bringing in new investors. In this way, the ponzi scheme keeps expanding.

In some cases investors do not receive a return, but mostly they only receive a return from the investment made by others. If no new members are added, the income flow also stops and the house of cards collapses. Ponzi fraud therefore only works when new members are constantly being introduced.

Network marketing is a well-known and popular form of ponzi fraud. Yet participants often do not know that they are part of ponzi fraud, because at first glance it appears to be a normal business model. It starts with a smile, and ends with a tear. Unfortunately, most participants often find this out too late.

Where does ponzi fraud come from?

This type of fraud has a remarkable name. That's because it's named after Charles Ponzi, a man who is considered the first Ponzi fraudster. In the 1920s, Charles Ponzi tried to bring in a large number of investors with false promises. For example, Charles promised investors large returns.

In order to build trust, Charles actually paid out some of the investors. But where Charles indicated that the profit was the return achieved, in reality it was just money that came from other investors.

At one point, investors found out that the investment product Charles was promising did not exist at all. When things got too hot for him, he fled.

Ponzi fraud within the crypto market

Despite the fact that ponzi fraud is an old phenomenon, we are also seeing it recur in new markets. Cryptocurrencies are unfortunately not spared from ponzi fraud. Fraudsters promise people large returns on an investment in their crypto project or crypto fund. Investors can earn even more money when they bring in new investors. They receive these rewards in the form of commissions.

When you participate in crypto ponzi schemes, you often only receive money based on the number of people you bring in. Thus, you do not earn the return based on an increase in the value of cryptocurrencies, but from the investments made by other participants. Are no new participants joining? Then participants no longer receive rewards.

Participating in a crypto ponzi scheme earns virtually no money, unless you are one of the first to participate in the ponzi scheme. That does not make a reason to participate when you can be one of the first. As mentioned, ponzi fraud is illegal and thus you can be prosecuted for participating.

How to recognize a ponzi scheme

Understandably, you don't yet know how to recognize ponzi fraud. In many cases, a ponzi scheme looks like a legitimate opportunity to make money. Nevertheless, there are a number of characteristics that allow you to recognize ponzi fraud fairly quickly.

You can recognize ponzi fraud by the following:

A return on an investment is guaranteed. When something is legitimate, they will never guarantee a return and point out the risk of losing your stake.
You are encouraged to bring in new participants. For every new participant you receive additional commissions. Do these participants bring in new members? Then you also receive a shared commission. The investments of participants are thus shared among everyone above them.
After an investment, you will soon be asked for a second or third investment, without being able to withdraw the return of the first investment. Fraudsters often use false excuses to still receive a reinvestment. For example, they may claim to need additional money to send the previous return over the blockchain network.
The strategy behind the earnings model is difficult to understand and consists of a lot of jargon. This makes it difficult for new participants to understand what they are actually investing in.
It is difficult to get money paid out. In many cases you have to pay extra fees or wait a long time. Fraudsters indicate that these fees are charged to send crypto over the blockchain or come up with other excuses.
Participants or people interested in participating cannot see official documents from the company anywhere.
A company that carries out ponzi fraud is usually not registered with De Nederlandsche Bank (DNB) or Autoriteit Financiële Middelen (AFM). 

In some cases, ponzi fraud is confused with affiliate marketing. In affiliate marketing, people are rewarded by companies when they bring someone on as a customer. The main difference is that the income from affiliate marketing comes from bringing in a customer/sale. In ponzi fraud, people must first make an investment in order to join at all, and revenue comes from investing in new members.

Are you unsure if you are dealing with crypto ponzi fraud? Then always contact the Coinmerce support team. This can be done by email ([email protected]) or via the live chat on our website.