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People have fallen victim to multiple fraudulent investments and businesses in their quest for more income streams. This dubious scheme has been around since the 19th century, luring many investors with promises of a higher return on investment.

The investment practices fall into two popular categories: Ponzi and Pyramid schemes. One remarkable attribute of these schemes is the promise of higher profits for a short investment period, enticing potential investors.

That’s why it’s crucial to understand how they carry out their ploys and lure unsuspecting investors. This article will equip you to identify pyramid and Ponzi schemes, their features, and how to avoid falling prey to their ploys.

What is a Ponzi Scheme?

A Ponzi scheme is a fraudulent investment management initiative that promises investors highly lucrative returns on investment with little or no risk. The investment details often need to be more specific and more accessible.

However, despite their shady nature, they gain investors’ trust by following adverts by renowned personalities or celebrities. Unlike traditional business operations, Ponzi has no legitimate source of generating revenue or paying dividends. Instead, it relies on its investors for survival.

It pays early investors with funds from newer investors who sign up with the scheme. The organizers of the investment platform put more energy into getting new investors so that the company will thrive; otherwise, it collapses.

Notably, the name Ponzi scheme came from Charles Ponzi, an Italian-American businessman who became popular in the 1920s after implementing this method. Although this kind of fraudulent investment got its name from Charles Ponzi, he was not the inventor of the scheme.

In fact, no man was the originator, and according to history, the investment scheme started with women in the 19th century. A German woman carried out the first instance, Adele Spitzeder, in 1869, who established the fraudulent Spitzedersche Privatbank in Germany.

Again, the second Instance was from another woman in the United States, Sarah Howe. She operated the fraudulent Ladies’ Deposit Company in the mid-1870s.

But why was the scheme named after Charles Ponzi? Charles Ponzi’s scheme became very popular due to the astounding returns he offered. He made investors believe their profits were coming from a legitimate running business.

Ponzi Scheme in the Crypto Industry

Unfortunately, the Ponzi scheme has penetrated the global digital economy, primarily targeting the crypto industry. Since crypto involves highly decentralized digital currencies, often offering anonymity, scammers have utilized the opportunity to defraud crypto enthusiasts.

In addition, cryptocurrencies’ high risk and volatility prompt investors to seek lower-risk options with higher returns, making them a vulnerable target for scammers.

As a result, many crypto-related Ponzi cases have been reported where fraudsters promise investors high returns on their investments.

The schemes come in various forms, mirroring multiple investment opportunities in the crypto space to get their victims. These cases include the Onecoin, PlusToken, Mining Max, GainBitcoin, and Bitconnect crypto scams.

Let’s examine how some of the listed Ponzi schemes operated. 

Mining Max

Mining Max used an alleged crypto cloud mining project as a deceptive tool to hide its illegal activities. The platform claimed to allow investors to capitalize on the crypto boom.

It allowed investors to participate in a multi-coin mining ecosystem that could generate high returns. 

Like all crypto Ponzi schemes, Mining Max relied heavily on massive marketing campaigns to attract new investors. The perpetrators succeeded in attracting more than 18,000 investors from 54 countries. 

They made the project appear legit and genuine and spent only $70 million out of the $250 million raised on mining hardware. They spent the remaining $180 million to fund massive marketing campaigns and lavish lifestyles for their team members.

PlusToken 

PlusToken was one of the biggest Ponzi schemes in the history of the crypto world. Most of PlusToken’s marketing was through the Chinese messaging app WeChat and enticed investors with the promise of 10-30% month-to-month returns. 

The project attracted over 3 million investors, primarily based in China, Korea, and Japan. The project’s business model revolved around crypto literacy and wallet service. 

Furthermore, the fraudsters tricked investors into believing they could increase their earnings by purchasing the project’s token, PlusToken.

After a year of scamming investors, PlusToken shut down in 2019, and the organizers fled with more than $3 billion worth of cryptocurrencies.

Early Orchestrators of the Ponzi Scheme

According to reports, Ponzi scheme some individuals in the 19th century operated Ponzi schemes before Charles Ponzi. Some early orchestrators of the Ponzi scheme include Adele Spitzeder, Sarah Howe, Charles Ponzi, etc.

Adele Spitzeder 

In 1869, Adele Spitzeder founded the Spitzedersche Privatbank, which increased because she paid high interest rates on the deposits. She operated the first version of the Ponzi scheme to continue living a life of luxury and extravagance.

According to a report, she targeted women only and promised her investors a 10% interest per month. The return on investment she offered was so fascinating that her investors had to call her the “Angel of the Poor.”

Her bank kept growing as new depositors kept putting money into it, but she filed for bankruptcy when she couldn’t meet up to pay back several depositors at once.

Sarah Emily Howe

In 1879, Sara Howe launched the Ladies’ Deposit Company. The Ladies’ Deposit Company was either a “women’s haven,” an “investment opportunity,” or a “bank,” depending on whom Howe spoke with at the time. 

Only single women with modest incomes could deposit money, and she offered a generous eight-percent monthly interest rate.

She claimed that it is a way to help women become financially independent. Her strategy was to target audiences who are less powerful, less influential, and those who are less likely to complain.

Howe made it difficult for depositors to withdraw the capital and the interest but only allowed interest withdrawal.

When people complained, she explained that she did not want them to waste their money on fripperies. Sadly, investors lost $30,000 (worth a considerable amount at the time) when the company went bankrupt.

Charles Ponzi

1920, Charles Ponzi founded the Securities Exchange Company in Boston City, United States. He claimed he could buy bulk international postal reply coupons at discounted rates and exchange them in the US. Dollars. 

These postage reply coupons are slips of paper that post offices would exchange for stamps. It helps people send a letter to include return postage when seeking a response from a recipient in another country. 

Ponzi promised investors 50% returns in 45 days and 100% in 90 days. He used new investors’ money to pay older investors, and because early investors received a handsome return, more investors joined.

Due to his remarkable success, investors soon contacted him to take their money. As the business progressed, the operation was unclear to authorities, so they launched a federal criminal investigation against him.

The report said he stole $15 million from his investors within the business’s first eight months.

What is a Pyramid Scheme?

A Pyramid scheme is an unsustainable and fraudulent investment that offers investors quick and high returns with little to no stress. The business or investment structure is like a pyramid, as one or a few persons at the top are new members for it to expand downward.

It works just like a Ponzi scheme, but here, old investors make their returns by recruiting new investors. It works because new investors must pay a deposit to participate in the scheme.

This deposit is then used to repay the initial investors, and new members are promised a commission as the scheme attracts more new members.

Notably, the schemes do not necessarily have to involve selling products or having a network of distributors. Instead, the trend is to include selling products or a network of distributors to appear legitimate. 

The organizers keenly take these steps for the sole purpose of avoiding the regulatory agencies.

The schemes collapse when there are no new recruiters, but the promoters often target close groups to gain investors’ trust and multiply. These groups include families, religious, social, sports teams, college students, etc.

The founders promote some fraudulent investments under attractive names, like gift programs or investment clubs. William Miller perpetrated a typical example of this kind of fraud in the 19th century.

1899 William Miller operated the Franklin Syndicate and promised a 101% weekly return, or 520% yearly. 

The impressive interest rate on investors’ funds gave him a new name, “520 Percent,”.He claimed to work with insiders in the stock market for his investors to consider their investments profitable.

Miller started by convincing three of his friends to get more investors as the business progressed; he offered the older investors a 5% original commission. With this, they were motivated to recruit their friends and relatives to the Franklin Syndicate investment platform.

However, his investment operations were more questionable as he could not give explicit business details, leading to his ten years of imprisonment.

Pyramid Scheme in the Crypto Industry

Like Ponzi, Pyramid schemes have been around for a while. Unfortunately, the Pyramid scheme has also infiltrated the crypto industry, making the industry appear as a fraudulent innovation. A typical example of one of the reported cases is the Onecoin scam.

Onecoin 

Onecoin was one of the longest-running Pyramid schemes in the crypto space. It was created by Ruja Ignatova, a Bulgarian scammer called Cryptoqueen, and operated between 2014 and 2017. 

During this time, Ignatova amassed $5.8 billion from her victims by hyping Onecoin as the “Bitcoin Killer.” Moreover, she projected it as the next big thing in the crypto market.

Being a Pyramid business venture, Onecoin had a multi-layered marketing plan that rewarded members with cash every time they recruited a new investor. However, when instigations and questioning grew against her crypto project, she disappeared into thin air.

A Comparison Between the Ponzi Scheme and Pyramid Scheme

As stated earlier, both schemes look similar to each other, but there are a few things that differentiate them. The table below shows some differences between Ponzi and Pyramid schemes.

Signs to Identify Ponzi and Pyramid Schemes

• High and unrealistic returns

Any investment that offers to give its investors lucrative and unrealistic returns in a short space of time is a red flag.

• Lack transparency

When the details of a business operation are questionable and sketchy, it is a sign of a potential Ponzi or Pyramid scheme.

• Focuses on recruiting new investors

Most businesses with questionable working principles focusing more on recruiting new investors will likely be Pyramid schemes.

• Unregistered or unauthorized investments 

A business or investment that always turns down or shows no interest in getting registered to acquire proper documentation is a red flag.

• High-pressure and scarcity tactics

Scammers often use high-pressure methods to convince potential investors to invest in their projects as soon as possible. They can emphasize that the offer is ending soon, warn that it won’t last, or offer exclusive deals to those who act now.

Conclusion

Ponzi and Pyramid schemes are business or investment scams deployed to extort potential investors. The organizers of the schemes often promise significant returns than any conventional investment with little or no risk.

Again, the investment platforms are neither registered nor licensed by state or federal authorities. Moreover, the investment strategy is often too complex to comprehend. Note that the pyramid scheme also rewards those at the top.

The scheme pays those at the top with a share of the money contributed by the recruits. Those at the bottom make little or no money, primarily when no recruits exist. Although these schemes have infiltrated the crypto industry, it does not make crypto a scam.

Therefore, all investors should do in-depth research before investing.

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