Cryptocurrency has taken the financial world by storm, offering a new and exciting way to invest and transact online. It has been acknowledged by many as a disruptive technology that may change the way we bank and operate online. Although, the technology still has a long way to go and regulation is minimal in the market at present. But with its rapid rise in popularity, some people have started to ask the question, is cryptocurrency a Ponzi scheme?
In particular, some skeptics have compared cryptocurrency to a Ponzi scheme. This is perhaps because, similar to Ponzi schemes, cryptocurrency investment may promise high returns and requires a ton of capital up front. Not to mention, some people have started cryptocurrency companies, gathered the initial investment and then taken off in the night — like a true heist. In this article, we’ll answer the question, is cryptocurrency a Ponzi scheme? We’ll also point out what to look for if you want to get involved in crypto investing, despite the negativity surrounding the market.
Table of contents
What Is a Ponzi Scheme?
To answer the question, is cryptocurrency a Ponzi scheme, we must first define what a Ponzi scheme is.
According to the Oxford Learner’s Dictionary, a Ponzi scheme is a way of making money. It is where people are persuaded to invest in a business venture by promising them a high rate of interest. The money from new investors is used to pay off earlier investors. If there aren’t enough new investors or the source of investors depletes, the scheme collapses. People who have recently invested often lose their money to an earlier investor.
Finally, the original business venture used to convince people to invest rarely manifests or becomes real. Rather, the money is being moved around from investor to investor, but no real business activity occurs. In other words, a Ponzi scheme is a fraudulent investment tactic. It relies on new investors to pay off earlier investors. It eventually falls apart when there aren’t enough new investors to sustain it.
How Does a Ponzi Scheme Work?
The term “Ponzi scheme” comes from a man named Charles Ponzi. He stole over $20 million from people by offering a program that claimed to use postal reply coupons to make big profits. Charles Ponzi triggered a new type of scam that is still being used today, but with new parameters.
A Ponzi scheme can be explained using a chain reaction. The first group of investors gets their promised returns. But then the scammer uses the money from the next group to pay the first group. This cycle continues until there are no more new investors, and the scheme collapses.
Related Reading: Will Planning Guide Canada
Is Cryptocurrency the Biggest Ponzi Scheme in History?
The question of whether cryptocurrency is the biggest Ponzi scheme in history has been a topic of debate. Recently, Actor Ben McKenzie made a statement to the U.S. Senate Banking Committee. He said that the cryptocurrency market is the “largest Ponzi scheme in history”. He compared it to the infamous fraudster Bernie Madoff’s scheme — but not everyone agrees with McKenzie.
Unlike a Ponzi scheme, cryptocurrency operates on a decentralized network. This network is not controlled by any government or financial institution. Its value is determined by market demand and supply. Investors have the freedom to buy and sell at any time.
However, some cryptocurrency projects have been involved in fraudulent activities. One such example is the ICOs (Initial Coin Offerings) scams. This is where someone intends to launch a cryptocurrency or related product/service and collects funding through an ICO, which is similar to an Initial Public Offering (IPO). However, the cryptocurrency or intention is not real and the scammer pockets the money gathered through the ICO. This led to initial concerns about crypto legitimacy.
There may be similarities between Ponzi schemes and some cryptocurrency projects. But, labeling all cryptocurrency as a Ponzi scheme is not fair or true. There are several leaders in the industry who appear to be operating ethically, such as Bitcoin and Ethereum. The same parallel of legitimacy can be seen in the regular finance industry. Many financial endeavors are real and truly return what they promise to investors, but there are also scammers who will exploit the system for personal gain. Does that make the entire financial system illegitimate? No. But it does mean you have to be wary with your money and how you choose to invest it.
How Do You Tell If a Cryptocurrency Project is a Ponzi scheme?
As mentioned, not all cryptocurrency is a Ponzi scheme, but there is a lot of shady activity going on. For this reason, you should do your due diligence before investing. Ponzi schemes are on the rise, promising high returns with minimal risk. As such, investors should be cautious before investing in any novel crypto project. It is important to look out for red flags such as:
1. Promises of ridiculously high returns
Be wary of promises of guaranteed high returns when investing in cryptocurrency. All investments carry some degree of risk. Furthermore, cryptocurrency investments are subject to market fluctuations. Any claims of guaranteed high returns should be viewed as a potential red flag. If it’s too good to be true, it probably is!
2. Unregistered investment projects
Before investing in a cryptocurrency project, it is important to be sure the company is registered. It must be registered with regulatory organizations, specifically with the Canadian Securities Exchange and/or United States Securities and Exchange Commission. This means the company has submitted details about its revenue models to the authorities and must oblige by certain regulation. Plus, it is less likely to be involved in a Ponzi scheme because of the additional work involved (it’s likely not a get rich quick scheme). If a company is not registered, it may be a red flag. As a result, investors should exercise caution before investing.
3. Use of sophisticated investment strategies
Be wary of crypto investment schemes that tout complex trading strategies. Often, they communicate that such strategies are too sophisticated for regular people to understand, so they don’t bother to explain it. This is usually a tactic used to conceal fraudulent activities.
4. High level of centralization
Be cautious of cryptocurrency projects that lack a decentralized blockchain system and rely on internal servers to operate. These centralized platforms are a red flag for potential Ponzi schemes.
5. Multi-level marketing
When you come across a cryptocurrency project with the multi-level marketing features, be cautious! They seem to offer complex earning schemes with multiple levels of users and referral programs, coupled with referral percentages and sliding scales. Another sign you may want to look out for is participants generating revenue by recruitment. This is usually done by recruiting others to join the network, like a pyramid scheme. Also, the marketing of products and services is inclusive.
Related Reading: Evaluating a Wealth Manager: The 4P’s of Manager Research
Is Crypto a Bad Investment?
The question of whether cryptocurrency is a bad investment doesn’t have a clear-cut answer. Experienced crypto investors might find it to be a profitable addition to their portfolio. While others have compared the hype around crypto to a Ponzi scheme.
The SEC also remains skeptical of cryptocurrency. This has to do with the associated risks such as government regulations, fraud, hacks, and loss of capital. Fraud is particularly rampant in the crypto industry. This is due to a lack of regulatory oversight which eventually leaves many investors with empty pockets. Hacking is a common issue and insurance may not always cover losses. Additionally, only a small number of businesses accept crypto as a form of payment, which limits its potential as a global currency.
The truth is, crypto investment has the potential for both profits and losses. New investors should approach it with caution and expect volatility. When it comes to safety, more stable cryptocurrencies like Bitcoin and Ethereum are recommended.
Which Crypto Is a Pyramid Scheme?
A pyramid scheme is another type of illegal activity, similar to a Ponzi scheme. It involves paying participants who recruit other participants. The funds from the later participants are used to pay the earlier participants.
It’s important to know that not all cryptocurrencies are pyramid schemes. Although, there have been cases of pyramid schemes that operate using cryptocurrencies. One example of such a scheme is Forsage. They were charged by the SEC in August 2022 for violating federal securities laws. Forsage allegedly raised over $300 million from retail investors worldwide, including in the US. The scheme’s founders and promoters were charged with violating registration — coupled with anti-fraud provisions of the federal securities laws. Experts agree that pyramid schemes like Forsage are harmful to retail investors. The use of smart contracts and blockchains cannot circumvent federal securities laws.
Investors should do their due diligence and research any investment opportunity before fronting cash. Particularly in the cryptocurrency space, to avoid falling victim to such scams like pyramid schemes.
Is Cryptocurrency Legal in Canada?
The Canadian government is supportive of digital currency and its potential impact on the economy. They have taken small steps to regulate and legitimize its use within Canada. For instance, Canada launched the first Bitcoin ETF in North America, which has been very successful. Consequently, Canadians can use and invest in cryptocurrencies such as Bitcoin and Ethereum.
However, cryptocurrency is not considered legal tender, unlike coins and banknotes. In addition, many vendors across Canada do not accept cryptocurrency as a form of payment yet. We’ve still got a long way to go before it’s fully legal and unrestricted, like ordinary cash.
Related Reading: What are futures?
Is Cryptocurrency a Bubble?
The answer is not so cut and dry, but some people think it is. A bubble is when people are willing to pay more for something than it’s worth, just because they think they can sell it for even more later on. Sometimes a bubble arises when people believe the value of an asset will continue to increase overtime. Then people invest more, causing the price to rise further, leading to a vicious cycle, until eventually the whole bubble pops.
Big names like Warren Buffett believe the whole cryptocurrency market is a bubble. Even some Nobel Prize winners in economics say the same. Even some central bankers and investors think so too. They believe the prices are too high and not based on real value, but just on people’s hype and speculation. However, not everyone agrees with this view. Some experts say cryptocurrency has real value and its prices are justified. They believe the market is just going through ups and downs, like any other market, and it will eventually stabilize.
So, whether the cryptocurrency market is a bubble or not is still up for debate. But what’s important is to do your research and invest wisely, regardless of what others may think.
Does Crypto Have a Future?
The future of cryptocurrency in 2023 is uncertain, but some predictions can give us an idea of what’s to come. One of the top predictions is there will be epic battles against overregulation in the crypto market — a battle with the community fighting to maintain decentralization. On the other side, governments will seek to regulate the market.
Another prediction is that a lot more investors will adopt Bitcoin. Some experts predict that more than 500 million people worldwide will own Bitcoin by the end of 2023. NFTs are also expected to continue their rise, with sustained high-risk appetite in NFT funding in 2022. This indicates it will be one of the first sectors to recover in 2023.
Meanwhile, the bear market is expected to come to an end at the beginning of 2023, which would make the industry regroup and prepare for a big push heading into 2024. Ethereum is expected to outperform Bitcoin again. While Web3 and decentralization of the crypto market may even project a bigger bull run than many experts predicted.
However, most crypto coins are expected to disappear, and crypto trading will be made easier with the emergence of platforms like Dash 2 Trade. Overall, while the future of crypto is uncertain, there are certainly exciting developments to look out for in the coming years.
Is cryptocurrency a Ponzi scheme? The short answer is no, not all cryptocurrencies are Ponzi schemes. But, like any other investment, there are risks involved. In many ways, the risks of crypto are even greater because it’s not an ordinary, traditional investment. Investors should do their due diligence before investing in any cryptocurrency. Protect yourself and your wealth!
Read More: Fear and Greed Index