Know Your Scam: How to Identify and Avoid Ponzi Schemes

Main Takeaways

• Ponzi schemes are a common scam that pays off debts to early “investors” with money taken from later “investors.” However, there is no real viable business model.  

• Be wary of anyone offering unrealistic returns or inviting you to join an exclusive “crypto investing scheme.” 

• Have you fallen victim to a scam? Report the incident immediately to relevant law enforcement authorities and the Binance Support team. 

Learn about crypto Ponzi schemes and how to avoid and identify them in our latest edition of Know Your Scam. 

What is a Crypto Ponzi Scheme?

Imagine someone telling you that you could make a fortune in a short period of time with little to no risk. All it would take is a small investment. On top of that, imagine you were told to spread the supposed “opportunity” to as many people as possible. 

This dynamic is the hallmark of a Ponzi scheme, a common scam that pays off debts to early “investors” with money taken from later “investors.” Ponzi schemes exist across industries and can arise in any setting that enables investment activity. Unfortunately, these schemes are rampant in the crypto world. 

In this article, we’ll delve into how crypto Ponzi schemes typically unfold and, most importantly, what you can do to protect yourself from them.

How Ponzi Schemes Work

In most Ponzi schemes, there is no real “investment,” and a large majority of the profits, if not all, are collected by the scammer. Money is shuffled from new victims to prior ones, and this redistribution of funds creates an appearance of profitability that keeps the scam going. 

So long as there is a sufficient influx of members, the financial fraud continues. Once this runs out, the scheme reaches a breaking point and collapses.

Here’s a run-down of the typical progression of a Ponzi scheme, summarized in three steps.

Step 1: Create an attractive scheme

The Ponzi scheme is one of the oldest tricks in the book. Its origin traces back to the early 1920s with Charles Ponzi, an Italian immigrant in North America who promised investors a 40% return in just three months. 

Charles’ scam was simple: pay yesterday’s investors using money from today’s investors and pocket the remaining profits. His 40% promise would continue to attract unsuspecting victims, garnering over 30,000 of these “investors” in less than six months. 

Charles was arrested after his scam eventually collapsed, stripping his “investors” of around 20 million USD (approximately 207 million USD when adjusted for inflation). By comparison, Bernie Madoff’s similarly-run company collapsed in 2008, costing his “investors” around 18 billion USD. This case is often credited as the largest Ponzi scheme in history. 

Step 2: Rewarding early investors

Ponzi schemes intentionally pay out the promised returns to early investors, who, in turn, will then believe the scheme’s legitimacy and go as far as to tell their friends to invest. 

Today, it’s also quite common to see Ponzi schemes advertising extra “rewards" or “bonuses” to those who successfully refer new investors. Some scammers will enforce mandatory referrals if “investors” want to continue earning money. This technique allows scammers to find new victims with minimal effort. 

In some cases, there are scams with elaborate reward structures where “investors” or “employees” must recruit other victims to earn their salary. Cases like these are often known as pyramid schemes.  

Step 3: The collapse

Eventually, a house of cards will come tumbling down. 

The ringleaders usually have an escape plan set in motion once they reach a certain level of profit or when they sense the scheme is about to fall apart. On the other hand, while a small number of investors may see returns, the vast majority are wiped out and left with nothing. 

To help users identify Ponzi schemes in the crypto world, our Binance Risk team developed this formula after analyzing numerous real-life cases: 

Invitation + Guarantee of Unrealistically High Returns + No Loss of Principal + Referral Rewards = Ponzi Scheme

Example of a Crypto Ponzi Scheme

The user, whom we’ll call Lily, participates in a crypto investment fund that initially generates 10% returns. However, according to the scammer, if Lily wants to continue “earning,” she must refer new clients to invest.

The scammer promises Lily a 15% reward for inviting ten clients. If those new clients continue to invite other people, Lily will receive 7% as the second-level reward, and so on. 

Lily realizes this is a Ponzi scheme only after it collapses with all her funds. 

Tips to Protect Yourself From Ponzi Schemes

It can be difficult to identify a Ponzi scheme, but here are some common signs to look out for.

• Be wary of high-return crypto offers or “schemes” that lock your money under confusing and arbitrary terms. As a general reminder, it’s always best to conduct thorough research before making any investment decisions. 

• Treat all investment opportunities that promise guaranteed high-returns as possible scams. There tends to be a trade-off between risk and reward; Any investment promising both attractive return and 100% guarantee is highly suspicious.

• Approach invitations to join “investing teams” with caution, especially if they’re advertising returns that seem too good to be true.

• Ask for official paperwork behind any crypto investment “plan” or “scheme.” If the investment strategy is confidential or dismissed as too complex to explain, it’s likely a scam. 

• Question how any “scheme” generates returns for its investors. Be careful if it’s through a method you’ve never heard of before. 

If You’ve Been Scammed by a Crypto Ponzi Scheme

In the unfortunate case that you find yourself the victim of a Ponzi scheme, here are some steps you can take to help mitigate the damage.

• If you’ve provided sensitive details, change your passwords and freeze your bank or any other affected financial accounts immediately. 

• Report the incident to local law enforcement. Binance works closely with law enforcement, and our cooperation regularly results in detections and seizures. While recovering your money is far from guaranteed, this is, in most cases, the only option available. 

• Report the case to the website, app, or social media platform’s moderators from where the scammer approached you. Provide them details like the scammer’s profile name and any other information that may help prevent others from being scammed.

• Be cautious of “recovery services.” While some may offer legitimate assistance, many often make false promises or require upfront payments. Don’t get scammed twice. 

We also encourage all users, both new and old, to read through our anti-scam series to better equip themselves against common crypto scams. 

Further Reading

• Know Your Scam

• Know Your Scam: A Definitive Guide to Crypto’s Most Prevalent Scams 

• Know Your Scam: Protect Yourself From Binance Imposter Scams

• Know Your Scam: Fake Crypto Investments to Watch Out For 

• Know Your Scam: Protect Yourself From Crypto Giveaway Scams 

Disclaimer and Risk Warning: This content is presented to you on an “as is” basis for general information and educational purposes only, without representation or warranty of any kind. It should not be construed as financial advice, nor is it intended to recommend the purchase of any specific product or service. Digital asset prices can be volatile. The value of your investment may go down or up, and you may not get back the amount invested. You are solely responsible for your investment decisions, and Binance is not liable for any losses you may incur. Not financial advice. For more information, see our Terms of Use and Risk Warning.