Crypto Ponzi Schemes: How to Identify and Protect Yourself From These Scams

People may invest in new projects that promise profits that seem “too good to be true” as a result of rags-to-riches tales supported by cryptocurrency investments.

We’ve all heard stories of people who invested in cryptocurrencies and went on to become multimillionaires. It’s only reasonable to want to invest in what seems to be an exciting new asset class when you hear these stories of people who, just a decade ago!, put a little money into a new digital asset called bitcoin and witnessed the kind of exponential rise that created new millionaires. For comparison, it took Microsoft 44 years, Apple 42 years, Amazon 24 years, and Google 21 years to reach the same milestone as bitcoin, which was reached in just 12 years.

Even in the midst of the present “crypto cold,” there are many reasons to be hopeful about the future of cryptocurrencies. There are more justifications for skepticism, and many in traditional finance are outspoken about theirs. Vice-chairman of Berkshire Hathaway, Charlie Munger, has stated that investing in cryptocurrency is equivalent to “investing in nothing” and has compared it to “some venereal disease.” The CEO of JPMorgan, Jamie Dimon, has referred to cryptocurrency tokens as “decentralized Ponzi schemes.”
However, major institutional firms like Fidelity are exploring letting individual consumers to trade bitcoin as well as adding it to their corporate 401(k) programs. Recently, BlackRock and Coinbase joined to provide cryptocurrency to their institutional clients.

To take a step back and help navigate these polarities, it might help to define exactly what a Ponzi scheme is.

What is a Ponzi scheme, anyway?

Investors are in a hard situation: They want to invest in the asset class and take part in the growth of cryptocurrencies, but they must through a steep learning curve in order to do it safely. Scammers are eager to take advantage of the risky predicament this puts well-intentioned investors in. However, there are several widespread red flags to watch out for to avoid falling victim to a Ponzi scheme.

Some things to look out for include:

• Very high returns with promises of little or no risk: Investors need to be very suspicious of “guaranteed returns” or promises of high returns with little risk. All investments carry certain amounts of risk and investors must be wary when presented with an opportunity that sounds too good to be true.

• Low volatility on returns: Ponzi schemes promise very consistent returns over time. Markets are volatile by nature. While returns can appear smooth over long periods of time, short-term performance is variable month after month. Red flags should pop up when promises of consistent returns are stated regardless of market conditions.

• Proprietary or secretive strategies: When a strategy is able to generate returns exclusively through a sophisticated or secretive strategy, investors should be concerned. If it is difficult to understand the methodology of an underlying investment strategy the investment should be avoided.

• Lack of liquidity: Certain assets are illiquid by nature (startup investments, real estate, etc.) but cryptocurrencies are very liquid. If a crypto investment is illiquid, the investor should understand exactly why that is and have a clear understanding of when the investment will be available for liquidation.

Investors must have a thorough understanding of the investment they are making and how it operates, regardless of the technology used. Investing in cryptocurrencies offers a special chance to fund companies and technologies that could upend numerous industries and have the potential to bring in large profits for investors. Investors must ensure that their exposure to these speculative investments is adequate for their desired risk and be ready for significant volatility and periods of poor or negative returns, just like with any disruptive and technology-based asset. You can protect yourself and your money safe with cryptocurrency by conducting your own research. If you are a victim of this Scam kindly consult Tactical Refunds for Free Consultation.