Ponzi scheme: Definition, How it works, Examples, and Prevention

Introduction to the Ponzi scheme

The Ponzi scheme is a financial fraud that relies on recruiting new investors to pay existing ones. It promises high returns with little or no risk, but inevitably collapses when the influx of new entrants slows down. This system is often confused with a pyramid scheme, although it is a specific variant.

Origin of the term and history

The term “Ponzi scheme” comes from Charles Ponzi, an Italian con artist in the early 20th century. In 1920, he set up a fraud based on the purchase and resale of international reply coupons. His scheme worked for a while, offering returns of 50% in 45 days, before collapsing abruptly.

“Charles Ponzi, the man who gave his name to modern financial scams.”

Notable historical examples:

• • Charles Ponzi (1920): Postage stamp scam.

• • Bernard Madoff (2008): Largest Ponzi scheme in history, valued at $65 billion.

• • OneCoin (2014-2017): Cryptocurrency fraud that caused billions in losses.

Definition and basic principles

A Ponzi scheme is based on a simple mechanism:

1. 1. An organizer promises guaranteed returns above market standards.

1. 1. The first investors receive their earnings with money from new entrants.

1. 1. The system continues as long as the number of investors grows.

1. 1. As soon as recruitment slows down, collapse is inevitable.

Why does it work (at first)?

• • Illusion of success: Early investors see gains, attracting more participants.

• • Aggressive marketing: Testimonials and proof of payments are used as arguments.

• • Lack of transparency: No real economic activity, making fraud difficult to detect quickly.

Important fact: Unlike pyramid schemes, a Ponzi scheme does not require participants to actively recruit new members. The organizer does this themselves.

Examples of comparable fraudulent investments

Type of fraud How it works Famous examples

Ponzi scheme Payment of returns with money from new entrants Madoff, OneCoin

Pyramid scheme Each investor must recruit other members Herbalife (not fraudulent, but controversial)

Cryptocurrency scams Promises of gains via tokens with no real value BitConnect, PlusToken

Conclusion

The Ponzi scheme is a formidable scam that has claimed many victims throughout history. Its legitimate appearance and enticing promises trap both novices and seasoned investors alike. In this article, we will look at how to identify these scams and avoid them.

Main characteristics of a Ponzi scheme

A Ponzi scheme has certain characteristics that make it easy to identify. These elements are always present in financial scams of this type and should alert investors.

Promises of high returns with little or no risk

The organizers of Ponzi schemes attract investors by guaranteeing them abnormally high returns. These offers are often presented as exclusive and risk-free opportunities.

Examples of typical promises:

• • 10% monthly return guaranteed, regardless of the market.

• • Double your capital in 3 months.

• • No risk of loss thanks to an “exclusive” method.

Why is this suspicious?

Traditional financial markets (stocks, real estate, bonds) offer average returns of 5 to 10% per year. A promise of returns well above the market with zero risk is impossible.

Lack of real economic activity

A Ponzi scheme is not based on any tangible product or service. The money collected from new investors is used solely to pay the old ones, without creating any value.

How can you check if there is real activity?

• • Is there a clear product or service?

• • Does the company publish transparent financial reports?

• • Do the returns come from a real market or only from new entrants?

Case study: BitConnect (2016-2018)

• • Cryptocurrency lending platform promising 1% daily returns.

• • No real product, profits came solely from new entrants.

• • Sudden collapse in 2018, causing billions in losses to investors.

Dependence on a constant flow of new investors

The central point of a Ponzi scheme is that it relies on a constant influx of new funds. As long as new investments cover withdrawals from existing investors, the system appears to be working. But as soon as growth slows, collapse becomes inevitable.

Warning signs:

• • Constant pressure to invite new investors.

• • Increasing difficulty in withdrawing money.

• • No concrete evidence of the origin of returns.

Feature Explanation Why is it suspicious?

High and guaranteed returns Promises of quick and risk-free profits No legitimate investment can guarantee this

No real product or service Money circulates only between investors No income-generating activity

Dependence on new investors New money is used to pay old investors Inevitably, the system collapses one day

Conclusion

A Ponzi scheme relies on unrealistic promises and total dependence on new investors. As soon as growth slows down, the system collapses, leaving the majority of participants with significant losses. In the next section, we will detail the precise workings of a Ponzi scheme to better understand its internal mechanisms.

Detailed workings of a Ponzi scheme

The Ponzi scheme follows a specific mechanism that allows it to function temporarily before its inevitable collapse. It relies on continuous recruitment, circular payments, and a complete lack of real value. Understanding these mechanisms is essential to detecting and avoiding this type of fraud.

Recruitment mechanism

A Ponzi scheme attracts victims with promises of quick profits and aggressive marketing. Organizers use various strategies to lure new investors:

Common recruitment methods:

• • Word of mouth: The first victims, who are still profiting, encourage their friends and family to invest.

• • Online advertising: Targeted campaigns on social media and financial platforms.

• • Influencers and fake testimonials: Videos of so-called investors who have multiplied their capital.

• • Exclusivity and urgency: Psychological pressure to invest quickly before the “opportunity” disappears.

Example: OneCoin (2014-2017)

• • Presented as a revolutionary cryptocurrency.

• • Webinars and VIP seminars to attract investors.

• • No real blockchain, proving the scam after the fact.

Payment cycle

The heart of the system is based on a deceptive circulation of money. Early investors are paid with funds from new entrants, creating an illusion of profitability.

“Typical cycle of a Ponzi scheme: new investors finance the returns of the first participants.”

Stages of the cycle:

1. 1. An investor pays an initial sum, attracted by attractive returns.

1. 1. The first participants receive their earnings, confirming the credibility of the project.

1. 1. The organizer redistributes the new funds without any real financial management.

1. 1. More investors join, fueling the machine until it collapses.

Why can’t it last?

• • The need to attract more and more investors becomes unsustainable.

• • Withdrawal requests exceed inflows, forcing organizers to flee.

• • When confidence wanes, panic leads to a sudden collapse.

Inevitable collapse

A Ponzi scheme can last from a few months to several years, depending on the skill of the fraudsters and the amount of money in circulation. However, all such schemes inevitably collapse.

Causes of collapse:

• • Decline in recruitment: Fewer new entrants means less money available.

• • Increased withdrawals: As soon as investors have doubts, they try to get their money back.

• • Authority intervention: Financial regulators identify and block suspicious transactions.

Example: Bernard Madoff (2008)

• • $65 billion in losses.

• • The 2008 financial crisis triggered a wave of withdrawals.

• • Total collapse, revealing one of the largest Ponzi schemes in history.

Factor Impact on the scheme Final consequence

Fewer new investors Less money coming in Decreased payments, growing mistrust

More withdrawals requested Insufficient funds The organizer blocks payments, possible flight

Investigation by authorities Accounts frozen Arrest of those responsible, losses for investors

Conclusion

The operation of a Ponzi scheme is based on an illusion of profitability and a cycle of fraudulent payments. Its collapse is inevitable, leaving the majority of investors ruined. In the next section, we will look at how victims are recruited and how they can try to recover their money.

Differences between a Ponzi scheme and a pyramid scheme

The terms Ponzi scheme and pyramid scheme are often confused. Although they share similarities, these scams are based on different mechanisms. Understanding these distinctions makes it easier to identify these frauds and avoid financial losses.

Organizational structure

Ponzi scheme:

• • Managed by a single entity (an individual or a small group).

• • Investors do not necessarily recruit new participants.

• • Money flows directly between the organizer and the investors.

• • Example: Bernard Madoff, who promised fixed returns with no referral requirements.

Pyramid scheme:

• • Each participant must recruit new members to earn money.

• • Money flows up the hierarchy, benefiting early entrants more.

• • Operates in successive levels (e.g., recruit two people, who recruit two more, and so on).

• • Example: Herbalife (heavily criticized for its pyramid structure), where income comes mainly from recruitment rather than product sales.

Criteria Ponzi scheme Pyramid scheme

Structure Managed by a single person/entity Hierarchical organization

Source of income New investors finance existing ones New recruits must invest to participate

Role of participants Invest passively Must recruit to earn money

Lifespan Can last several years Collapses quickly when recruitment slows down

Famous examples Bernard Madoff, BitConnect WakeUpNow, Fortune Hi-Tech Marketing

Remuneration mechanisms

In a Ponzi scheme, early investors are paid with money from new investors, without any real product or service being sold. The founder has complete control over the financial flows and decides arbitrarily on payments.

Conversely, a pyramid scheme is based on a recruitment model. Each member must pay an entry fee and recruit new members to recoup their initial investment and earn money. The higher a participant rises in the hierarchy, the more they earn.

Legality and regulation

Ponzi scheme: Illegal in all countries because it is based on pure financial fraud. Financial authorities (SEC, AMF, FCA, etc.) actively monitor these practices.

Pyramid scheme: Generally illegal, unless a legitimate product or service is sold. Some multilevel marketing (MLM) companies operate on the edge of the law.

Special case: multilevel marketing (MLM)

• • A legitimate MLM company sells a real product (e.g., Avon, Tupperware).

• • If income comes solely from recruitment, it is a disguised pyramid scheme.

Conclusion

Although similar in their fraudulent operation, Ponzi schemes and pyramid schemes differ in their structure and compensation mechanism. A Ponzi scheme is centralized and run by a single fraudster, while a pyramid scheme depends on recruitment and collapses even more quickly. In the next section, we will analyze famous cases of Ponzi schemes to better understand their impact.

Steps to recognize a Ponzi scheme

Ponzi schemes are often well disguised under promises of exceptional returns and an attractive presentation. However, there are several warning signs that can help identify these scams before it is too late. Here are the best methods for detecting a Ponzi scheme and avoiding losing your investment.

Warning signs: from guaranteed returns to opaque transactions

Before investing in a financial opportunity, it is essential to identify any suspicious elements. A Ponzi scheme has several recurring characteristics:

Promises of high and guaranteed returns

• • Abnormally high profitability (e.g., 10% per month) with no apparent risk.

• • A fixed income regardless of the market situation.

• • No evidence of a viable business model to generate such gains.

Lack of transparency

• • Inability to access audited financial reports.

• • No clear information on the investment methods used.

• • Company based in a tax haven, limiting regulation and oversight.

Difficulty withdrawing money

• • Withdrawal requests take a long time or require excessive justification.

• • Earnings must be reinvested to obtain additional returns.

• • Hidden fees reduce the possibility of recovering the initial investment.

Dependence on recruitment

• • The success of the program relies on a constant influx of new members.

• • Existing investors are encouraged to recruit friends and family.

• • Financial rewards are offered for referring other participants.

Key questions to ask before investing

Before investing your money, it is crucial to ask specific questions to identify a potential Ponzi scheme.

How does the company generate profits?

• • A legitimate company can clearly explain its business model.

• • A Ponzi scheme relies solely on money from new investors.

Is the investment regulated by a recognized financial authority?

• • Check whether the company is registered with the AMF (France), the SEC (USA) or another official institution.

Can I consult the official financial documents?

• • Any reputable company must provide verifiable financial statements.

• • A lack of transparency is a warning sign.

Can I withdraw my money at any time?

• • A legitimate scheme allows you to recover your funds easily.

• • A Ponzi scheme always finds excuses to delay withdrawals.

Tools and organizations for verifying an investment opportunity

Several platforms allow you to verify the legitimacy of an investment opportunity.

Tool/Organization Country Main function

AMF – Autorité des marchés financiers France Blacklist of fraudulent companies

SEC – Securities and Exchange Commission USA Regulation and prosecution of financial fraud

FINRA BrokerCheck International Verification of brokers and investment companies

Financial Conduct Authority (FCA) United Kingdom Financial market supervision

CNMV Spain Verification of legitimate financial companies

Tip: Before investing, consult these official databases to see if the company has already been reported as fraudulent.

Conclusion

Detecting a Ponzi scheme before investing in it is essential to avoid massive financial losses. By spotting the warning signs, asking the right questions, and using verification tools, you can significantly reduce the risk of being scammed. In the next section, we will analyze famous cases of Ponzi schemes to better understand how they work and their impact.

Famous cases of Ponzi schemes

Ponzi schemes have made history due to their scale and dramatic consequences. These often sophisticated financial frauds have caused billions of dollars in losses, affecting millions of investors. This section explores the most famous cases, detailing how they worked, who their victims were, and their impact.

Charles Ponzi: the original scam

1920s

Estimated loss: $15 million (≈ $225 million today)

Charles Ponzi, an Italian immigrant living in the United States, coined the term “Ponzi scheme”. His scam was based on a supposed opportunity to make money from international reply coupons. He promised returns of 50% in 45 days or 100% in 90 days, attracting thousands of investors.

Why did it work?

• • He used money from new investors to pay existing investors, creating an illusion of profitability.

• • He exploited people’s trust and the weakness of financial regulations at the time.

How did it collapse?

• • His system required exponential growth in incoming funds, which was unsustainable.

• • An investigation by the authorities revealed that he was not actually investing in the reply coupons.

• • Ponzi was arrested in 1920 and sentenced to several years in prison.

Bernard Madoff: the biggest financial fraud in history

1980–2008

Estimated loss: $65 billion

Bernard Madoff, former chairman of the NASDAQ, orchestrated one of the biggest Ponzi schemes of all time. For nearly 30 years, he promised consistent returns of 10–12% per year, attracting prestigious investors, including banks and investment funds.

Why did it work?

• • He had an impeccable reputation in the financial world.

• • He manipulated his financial reports, providing false account statements to investors.

• • His fund appeared stable even in times of crisis, reinforcing client confidence.

How did it collapse?

• • In 2008, the financial crisis prompted many investors to request massive withdrawals.

• • Madoff could no longer repay and confessed the fraud to his family.

• • He was arrested and sentenced to 150 years in prison in 2009.

OneCoin: the cryptocurrency scam

2014-2019

Estimated loss: $4.4 billion

OneCoin is a fake cryptocurrency project founded by Ruja Ignatova, nicknamed the “Cryptoqueen”. It promised investors a revolutionary new Bitcoin, guaranteeing exponential gains.

Why did it work?

• • Aggressive marketing combined with an MLM (network marketing) strategy.

• • A promise of low-cost mined tokens with an artificially inflated value.

• • A strong media presence and grandiose conferences to attract investors.

How did it collapse?

• • No real blockchain supported OneCoin, which was revealed by cryptography experts.

• • Ruja Ignatova disappeared in 2017, leaving investors with no way to recover their funds.

• • Lawsuits have been filed against several officials, but billions of dollars remain lost.

Comparison table of the largest Ponzi schemes

Name Year Amount lost How it worked Collapse

Ponzi 1920 $15 million (€225 million) Reply coupons Audit by authorities

Madoff 1980-2008 $65 billion Fictitious investment fund Mass withdrawals

OneCoin 2014-2019 $4.4 billion Fake cryptocurrency Disappearance of the founder

Conclusion

Ponzi schemes take various forms, but their mechanism always remains the same: financing old investors with money from new ones. Whether it’s a classic fraud like Charles Ponzi’s, a financial scandal like Madoff’s, or a modern cryptocurrency scam like OneCoin, the consequences are disastrous. In the next section, we will look at how authorities regulate and combat these frauds to protect investors.

Victim psychology and persuasion techniques

Ponzi schemes thrive on well-honored psychological strategies. Why do even seasoned investors fall into these traps? What are the cognitive flaws exploited by fraudsters? And above all, what are the psychological consequences for victims after the scam is uncovered? Let’s decipher the mechanisms at work.

Why do even experienced investors fall into the trap?

It’s easy to think that only financial novices fall for Ponzi schemes. However, history shows that seasoned professionals, banks, and even financial institutions have been victims of these scams.

Factors that make a Ponzi scheme credible:

• • The illusion of credibility: Scammers use technical terms, references to well-known institutions, and careful branding.

• • The group effect: Seeing friends, celebrities, or institutions investing in the project reinforces confidence.

• • The charisma of the fraudster: Scammers are often talented speakers, capable of manipulating emotions and dispelling doubts.

• • Evidence of artificial gains: The first waves of investors receive impressive returns on their investment, prompting them to reinvest and recommend the system to others.

Famous example: The Bernard Madoff scandal involved leading banks, investment funds, and wealthy individuals, who were seduced by the reputation and apparent stability of the returns.

Cognitive biases exploited by fraudsters

Scammers exploit well-known psychological flaws. These cognitive biases influence our decisions and make us vulnerable to scams.

Cognitive bias Description Impact on victims

Bias confirmation Tendency to seek information that validates our pre-existing beliefs. Investors focus on positive testimonials and ignore warning signs.

Bias authority Trust placed in authority figures or experts. The involvement of an influential personality in the project reassures investors.

FOMO (Fear Of Missing Out) Fear of missing out on a unique opportunity. Fraudsters create a sense of urgency to push people into investing quickly.

Anchoring bias Overestimating the first piece of information received. Investors take high initial returns as the norm and ignore the risks.

Scarcity effect A limited offer seems more valuable.

Scammers announce a limited number of investment opportunities, encouraging impulsive decisions.

Real-life example: OneCoin, a fake cryptocurrency project, exploited FOMO by organizing grandiose events and claiming that the value of the token was going to skyrocket, prompting investors to act quickly.

Psychological consequences after the scam is discovered

When a Ponzi scheme collapses, the financial consequences are dramatic, but the psychological impact is just as devastating.

Common reactions among victims:

• • Denial and shame: Many refuse to admit that they have been deceived, which prevents them from filing a complaint or seeking help.

• • Anger and guilt: They blame themselves for trusting the fraudster and recommending the investment to others.

• • Depression and anxiety: Some lose their life savings, leading to intense emotional distress.

• • Lasting mistrust: They become paranoid about legitimate financial opportunities, which can harm their future investments.

Testimonial from a victim of the Madoff scheme: “I had invested my entire retirement thinking it was safe. When I realized it was all a scam, I felt a mixture of anger and despair. I didn’t dare talk to my loved ones because I had convinced them to invest too.”

How can victims rebuild their lives?

Join support groups: There are forums and associations that help victims share their experiences and regain confidence.

File a complaint and cooperate with the authorities: Even if it is difficult to recover the funds, reporting the scam helps prevent other frauds.

Learn about finance: Understanding the basics of investing can help you avoid mistakes in the future.

Conclusion

Fraudsters exploit specific psychological mechanisms to trap their victims, whether they are novice or experienced. By recognizing these biases, it is possible to avoid pitfalls and take a more rational approach to financial opportunities. In the next section, we will look at how regulators and the law are trying to combat these scams.

Economic and social impact of Ponzi schemes

Ponzi schemes are not limited to individual losses: their repercussions extend to the economy and society as a whole. They cause massive financial losses, fuel mistrust of financial institutions, and have a profound impact on the social lives of victims. Let’s take a closer look at these consequences and their effect on financial markets.

Economic consequences: losses, bankruptcies, and public mistrust

Ponzi schemes cause considerable economic damage, affecting individual investors as well as companies and financial institutions.

The main economic consequences are:

1. 1. Massive financial losses: When the system collapses, the majority of investors lose all their capital, creating a shockwave throughout the economy.

1. 1. Personal bankruptcies and debt: Some investors take out loans or mortgage their assets to invest, which leads to ruin when the system collapses.

1. 1. Unemployment and job losses: When companies are involved in these scams, thousands of jobs can be lost, as was the case when Bernard Madoff Investment Securities collapsed.

1. 1. Decline in consumption and investment: Investor mistrust slows economic growth and reduces liquidity in financial markets.

1. 1. Widespread mistrust of financial investments: After a major scandal, investors are reluctant to invest their money, which can slow down financial innovation and the development of new technologies (such as blockchain).

Real-life example:

The Madoff scandal caused an estimated loss of $65 billion, affecting banks, charitable foundations, and individual investors around the world. Institutions such as HSBC and Banco Santander were affected, heightening mistrust of investment funds.

Social impact: family breakdown, isolation of victims

The consequences of a Ponzi scheme are not only financial. The psychological and social impact on victims is often devastating.

Major social consequences:

• • Family breakdown and conflict: Victims who have convinced their loved ones to invest may face tension or even separation.

• • Isolation and shame: Many victims prefer to keep quiet, out of fear of judgment or guilt.

• • Psychological distress: The loss of all retirement savings or life savings can lead to deep depression and suicidal tendencies.

• • Loss of trust in society: Victims develop increased mistrust of financial institutions and the business world in general.

Testimonial:

“I lost my savings believing in a unique opportunity. Not only did I lose everything, but my family still blames me for getting them involved. Today, I don’t dare talk about investing anymore.”

How do these scams affect financial markets?

Financial markets can suffer serious repercussions when a Ponzi scheme reaches a significant scale.

Impacts on the markets:

1. 1. Losses for banks and institutional investors: When a large fund is involved, it takes hundreds of thousands of investors with it, including pension funds and banks.

1. 1. Loss of confidence in financial regulation: A large-scale scandal highlights the flaws in regulatory bodies (SEC, AMF, etc.), fueling suspicion towards the financial sector.

1. 1. High asset volatility: When a Ponzi scheme in cryptocurrency or a specific sector collapses, it leads to a sharp drop in prices and a collapse in liquidity.

1. 1. Stronger regulation and investment restrictions: After every major scam, governments impose stricter regulations, which can slow down innovation and affect legitimate businesses.

Example:

The OneCoin scandal, a fake cryptocurrency that defrauded more than $4 billion, prompted several countries to tighten regulations on cryptocurrencies.

Conclusion

Ponzi schemes have repercussions far beyond the investors involved. They undermine confidence in the financial system, cause colossal economic losses, and leave behind psychologically broken victims. Their impact on markets can be long-lasting, prompting major regulatory changes and a reassessment of investor protection mechanisms.

Regulation and prosecution of Ponzi schemes

Ponzi schemes are illegal in most countries and are subject to severe penalties. Financial authorities closely monitor these frauds and regularly conduct investigations to protect investors. However, some scams escape detection for years, causing billions of dollars in losses.

Applicable laws and penalties

Each country has its own legal framework for combating Ponzi schemes. In general, these scams are punishable under several charges: financial fraud, embezzlement, breach of trust, and money laundering.

Examples of laws and penalties in different countries:

Country Main regulations Penalties

United States Securities Act (1933), Securities Exchange Act (1934) Prison sentences of up to 150 years (e.g., Bernard Madoff)

France Monetary and Financial Code, Financial Markets Authority (AMF) Fines and prison sentences of up to 5 years for fraud

European Union MiFID II Directive on investment services Strengthened investor protection and financial penalties

China Strict regulation by the CSRC (China Securities Regulatory Commission) Mass arrests and executions in some extreme cases

In addition to criminal penalties, fraudsters are often forced to reimburse victims, although in many cases the money has already been dissipated.

How the authorities (SEC, AMF, etc.) track down these frauds

Financial regulatory bodies play a key role in combating Ponzi schemes. They monitor markets, conduct investigations, and prosecute fraudsters.

Methods used by the authorities:

• • Financial market surveillance: Analysis of financial flows and suspicious patterns.

• • Investigating investor complaints: Reports from victims are often the starting point for an investigation.

• • Audits and financial controls: Checking the balance sheets of suspicious companies to detect inconsistencies.

• • International collaboration: Many Ponzi schemes are transnational, requiring cooperation between agencies (e.g., SEC in the US, AMF in France, FCA in the UK).

Example:

In 2023, the US Securities and Exchange Commission (SEC) dismantled a cryptocurrency-based Ponzi scheme that had defrauded more than $300 million from investors around the world.

Specific examples of recent legal proceedings

Ponzi schemes continue to emerge despite tighter regulations. Here are three recent cases that illustrate the scale of the problem:

Case 1: Bernard Madoff (2008)

• • Amount defrauded: $65 billion

• • Duration: Over 20 years

• • Victims: Pension funds, celebrities, private investors

• • Penalty: Sentenced to 150 years in prison

Case 2: OneCoin (2014-2019)

• • Amount defrauded: Over $4 billion

• • Duration: 5 years

• • Victims: Investors worldwide via a fake cryptocurrency

• • Penalty: Arrest of several executives, founder Ruja Ignatova remains at large

Case 3: Mirror Trading International (MTI) (2020-2021)

• • Amount defrauded: $589 million in Bitcoin

• • Duration: 2 years

• • Victims: 260,000 investors

• • Penalty: Arrest of CEO Johann Steynberg and confiscation of assets

Conclusion

Financial authorities are constantly strengthening surveillance measures to detect and punish these scams. However, fraudsters are always finding new strategies to circumvent the law, particularly through the use of new technologies and cryptocurrencies. It is therefore essential for investors to be vigilant and thoroughly check any investment opportunity before putting their money into it.

The evolution of Ponzi schemes in the digital age

With the rise of the internet, social media, and cryptocurrencies, Ponzi schemes have evolved to adapt to new technologies. These scams spread faster, reach a wider audience, and become more difficult to detect.

The rise of online and social media scams

Before the digital age, fraudsters had to organize physical meetings or contact their victims by phone. Today, with the internet, a Ponzi scheme can be launched and attract thousands of participants in a matter of days.

Factors contributing to online scams:

• • Social media and instant messaging: WhatsApp, Telegram, and Facebook have become major recruitment tools.

• • Globalization: There are no borders for these scams, which attract victims from all over the world.

• • Anonymity of scammers: The identity of the organizers is often hidden, making legal action difficult.

• • False testimonials and bots: Fake comments and positive reviews lend credibility to the scam.

Real-life example:

In 2021, Forsage, a project based on the Ethereum blockchain, was identified as a Ponzi scheme disguised as a decentralized investment opportunity. Despite warnings from authorities, the project continued to attract investors thanks to a strong presence on YouTube and Telegram.

Cryptocurrencies and Ponzi schemes: why doesn’t blockchain always protect?

Cryptocurrencies and blockchain technology are often perceived as secure and transparent. However, they are not immune to fraud. On the contrary, they facilitate the emergence of new Ponzi schemes.

Why are cryptocurrencies prone to scams?

• • Lack of regulation: Many cryptocurrencies escape the control of financial authorities.

• • Anonymity of transactions: Bitcoin and Ethereum transfers are difficult to trace.

• • Promises of exponential returns: The rise of the crypto market attracts inexperienced investors.

• • Complex technical concepts: Many people do not understand blockchain and trust false promises of gains.

Example: OneCoin

OneCoin, a fake cryptocurrency project launched in 2014, defrauded more than $4 billion before being exposed as a Ponzi scheme. The organizers claimed to have a revolutionary blockchain, but there was no real distributed ledger.

Recent examples and trends to watch

Digital Ponzi schemes are evolving and taking on new forms. Here are three trends to watch out for:

1. Ponzi schemes disguised as yield farming and staking

Some crypto projects promise huge returns simply by locking tokens into a platform. But instead of generating real interest, they pay early investors with money from new entrants.

Example: Bitconnect (2016-2018)

Bitconnect attracted thousands of investors with a cryptocurrency lending scheme, promising up to 40% monthly returns. Its collapse caused a loss of $2.5 billion.

2. NFTs and Ponzi 2.0

NFTs (non-fungible tokens) have become a new playground for scammers. Some projects sell NFTs with no real use, promising a high future value that never materializes.

Example: Frosties NFT (2022)

The founders of this project sold thousands of NFTs before disappearing with $1.3 million, leaving investors with worthless tokens.

3. Fake cloud mining services

Some websites claim to offer cryptocurrency mining without the need for hardware. Investors pay for mining packages, but in reality, there is no mining activity.

Example: Mining Max (2017)

A US-based program scammed $250 million by tricking investors into believing they were mining Ethereum.

Conclusion

Digital Ponzi schemes are booming, and blockchain does not prevent them. Investors must be extra vigilant, be wary of guaranteed returns, and check the transparency of projects before investing.

Testimonials and feedback

Ponzi schemes leave behind many victims, often ruined and traumatized. Their testimonials help us understand the psychological mechanisms that trap investors and identify the warning signs to avoid falling into this type of scam.

Victims’ stories and lessons learned

Testimonial from Marc, former investor in Bitconnect

“I discovered Bitconnect in 2017 on YouTube. Everything seemed legitimate: conferences, charismatic leaders, testimonials from people who had multiplied their investment. I invested $5,000, then $10,000.

At first, I received payments, but in January 2018, the site shut down abruptly. I lost all my capital. I learned never to believe in guaranteed returns and to always check the transparency of a project.”

Lesson learned: Never invest in a project that promises high, fixed returns with no risk.

Testimonial from Sophie, victim of OneCoin

“A friend told me about OneCoin in 2016. He said it was the cryptocurrency of the future that would surpass Bitcoin. I invested €3,000.

The founder, Ruja Ignatova, gave impressive speeches. When I wanted to withdraw my money, it was impossible! I was told to wait. Eventually, I realized it was a scam. Since then, I always do my research before investing.”

Lesson learned: Be wary of projects that lack transparency and promises of gains that are too good to be true.

Practical tips to protect yourself and avoid new scams

Check the legitimacy of the project

• • Look for independent reviews and consult specialized forums.

• • Check whether the project is registered with the financial authorities (AMF, SEC, FCA, etc.).

Analyze the compensation structure

• • A project based on recruiting new members rather than on real economic activity is suspicious.

• • Avoid fixed and guaranteed returns, especially if they exceed market rates.

Be wary of manipulative tactics

• • Fraudsters often use urgency and social pressure to encourage people to invest quickly.

• • Never invest under the influence of an influencer or a friend or family member without doing your own research.

Use verification tools

Consult specialized websites such as:

• • Investor.gov (official US government website for detecting fraud)

• • CryptoScamDB (database of crypto scams)

• • AMF (Autorité des marchés financiers) to see if a company is blacklisted.

Organizations and resources to help victims

If you are a victim of a Ponzi scheme, here are some resources to help you:

Organization Role Link

AMF (Autorité des Marchés Financiers) Fraud detection and investor protection www.amf-france.org

Interpol – Reporting cybercrime Help for victims of international scams www.interpol.int

Association Stop Arnaques Support for victims and legal advice www.stoparnaques.org

Action Fraud (United Kingdom) Reporting online fraud www.actionfraud.police.uk

Crypto Scam Alert (online community) Sharing experiences and detecting new scams www.cryptoscamalert.com

What to do if you are a victim

Gather all evidence (transactions, emails, messages).

File a complaint with the relevant authorities.

Join a support community to talk to other victims.

Conclusion

Testimonials show how Ponzi schemes can be convincing. Scammers exploit investors’ trust, greed, and ignorance. By staying informed and adopting a critical and cautious approach, it is possible to avoid these traps and protect your capital.

Conclusion and final recommendations

Ponzi schemes have been around for over a century and continue to evolve to adapt to new technologies and financial trends. They exploit trust, social pressure, and the allure of quick profits to trap their victims.

Summary of key points

• • Definition and how it works: A Ponzi scheme is based on a fraudulent model where early investors are paid with money from new entrants, without any real underlying economic activity.

• • Key characteristics: Promises of high returns, lack of transparency, and dependence on new investors.

• • Differences from a pyramid scheme: A Ponzi scheme relies on direct payments to investors, while a pyramid scheme pays recruiters.

• • Persuasion techniques used: Cognitive biases, false evidence of success, and psychological manipulation.

• • Economic and social impact: Personal bankruptcy, loss of confidence in the financial system, and family breakdown.

• • Legislation and penalties: Authorities such as the AMF, the SEC and Interpol actively track these frauds, but scams continue to emerge in new forms.

• • The digital age and cryptocurrencies: The rise of social media, online trading and crypto assets has facilitated the spread of new Ponzi schemes.

How can you protect yourself against these scams in the future?

Be wary of guaranteed returns

If an opportunity promises high fixed profits with no risk, it is probably a scam.

Check the transparency of the project

• • A legitimate business has accessible financial statements and identifiable managers.

• • Consult the official registers of the financial authorities.

Analyze the business model

• • Ask yourself this question: “Where does the money really come from?”

• • If the profits come solely from new members, then it’s a scam.

Avoid pressure and FOMO tactics

Fraudsters often push people to invest quickly by using phrases such as “Last chance before prices go up” or “Don’t miss this unique opportunity.”

Use official resources

Websites to consult to report fraud or verify an investment:

Resource Usefulness Link

AMF – Autorité des Marchés Financiers (French Financial Markets Authority) Blacklist of fraudulent companies www.amf-france.org

SEC (U.S. Securities and Exchange Commission) Financial fraud alerts www.sec.gov

Interpol Reporting cyber scams www.interpol.int

Crypto Scam Database Verification of suspicious crypto projects cryptoscamdb.org

Association Stop Arnaques Legal assistance for victims www.stoparnaques.org

Resources for further information

Recommended books

1. 1. “Ponzi’s Scheme: The True Story of a Financial Legend” by Mitchell Zuckoff

• • Publisher: Random House Trade Paperbacks

• • Publication date: 2005 (first edition)

1. 1. “The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron” by Bethany McLean and Peter Elkind

• • Publisher: Portfolio (Penguin Group)

• • Publication date: 2003 (first edition)

• • Note: An updated version was published in 2013.

1. 1. “Crypto-Scams & Ponzi Schemes: The Essential Guide to Staying Safe in the Age of Cryptocurrency” by David Gerard

• • Publisher: CreateSpace Independent Publishing Platform

• • Publication date: 2018

Documentaries to watch

• • “The China Hustle” (2017) – about financial fraud, directed by Jed Rothstein.

• • “Made You Look: A True Story About Fake Art” (2020) – about sophisticated scams, directed by Barry Avrich.

• • “The Tinder Swindler” (2022) – about manipulation and online scams, directed by Felicity Morris.

Final words

Ponzi schemes will continue to exist in new and sophisticated forms. The best protection remains financial education, critical thinking and caution before investing.

FAQs on Ponzi schemes

How does a Ponzi scheme work?

A Ponzi scheme is a fraudulent model in which money from new investors is used to pay previous investors. It is not based on any real economic activity and collapses when the influx of new funds slows down.

What is the difference between a Ponzi scheme and a pyramid scheme?

A Ponzi scheme is based on promises of fixed returns and pays existing investors with money from new investors. A pyramid scheme, on the other hand, requires each participant to actively recruit new members to generate profits.

What are the warning signs of a Ponzi scheme?

• • Promises of high and guaranteed returns

• • Lack of transparency about the investment

• • Difficulty withdrawing money

• • Pressure to recruit new investors

• • Lack of legitimate business activity

Are Ponzi schemes legal?

No, they are considered financial fraud and are illegal in most countries. Organizers face severe criminal penalties and heavy fines.

Why do investors fall for Ponzi schemes?

Fraudsters use psychological persuasion techniques, such as urgency to invest, social proof (testimonials from fake investors), and the illusion of regular returns. Even experienced investors can be fooled by enticing promises.

How can you get your money back after a Ponzi scheme?

It is often difficult to recover lost funds, but victims can:

• • Report the fraud to the financial authorities

• • Join class action lawsuits against the organizers

• • Seek the assistance of lawyers specializing in financial fraud

Are cryptocurrencies used for Ponzi schemes?

Yes, many modern Ponzi schemes exploit cryptocurrencies by promising unrealistic returns on investment platforms. The decentralized nature of crypto assets makes it more difficult to track funds and complicates the recovery of losses.

How can you avoid falling for a Ponzi scheme?

• • Always check the regulation of an investment project

• • Be wary of guaranteed returns that are too high

• • Research the management and business model

• • Never invest under pressure or in a hurry

What are the biggest Ponzi schemes in history?

• • Charles Ponzi (1920) – The creator of the concept, with a scam based on postage stamps.

• • Bernard Madoff (2008) – One of the largest Ponzi schemes, with an estimated fraud of $65 billion.

• • OneCoin (2014) – A cryptocurrency-related scam that defrauded several billion dollars.

What should you do if you suspect an investment is a Ponzi scheme?

We recommend that you:

• • Consult the blacklists of financial authorities

• • Report the project to regulatory bodies

• • Alert those around you to avoid further victims

• • Do not invest any more and try to withdraw your funds as quickly as possible