A number of crypto schemes have already been exposed as Ponzi schemes, such as BitConnect, which the US Department of Justice estimated its founders earned $2.4 billion. Therefore, knowing how to identify such systems is crucial to avoid falling victim to them, and here are 5 key red flags for spotting one.
Unreasonably high returns
In May 2022, TerraUST was listed among the best stablecoins in the world. The main reason for this is that it promised to offer up to 20% interest for staking the UST token on the Anchor Protocol.
Naturally, this attracted thousands of investors who saw an opportunity to earn significant returns from passive investing.
Unfortunately, the Terra ecosystem was backed by an algorithm supplemented by the Terra token (LUNA) and no real assets. When sellers started dumping LUNA tokens during the general cryptocurrency crash, the whole project came crashing down.
The lesson to be learned from this experience is to not just track high returns, but also consider the underlying technology. After all, when the deal is too juicy, you have to think twice.
Complex investment strategies
We all know how financial investments are supposed to work: just buy at a lower price and sell when the value goes up. However, Ponzi schemes attempt to trick potential investors with more “inventive” investment strategies.
Often these are not actually creative, but rather intended to mask the actual activities of the project. Truly trustworthy projects must put their cards on the table and explain exactly what they are doing. So, if the promoters of a particular project try to make it seem too complex, asking for blind trust, think twice before making your investment.
Read also Unusual: Binance, Gemini, Kraken and Coinbase could be taken to court for the Terra crash (LUNA/UST)
Blockchain technology was intended to create decentralized platforms governed by individuals rather than centralized financial institutions. The best cryptocurrency projects adhere to this principle and operate on a blockchain governed by a decentralized autonomous organization (DAO).
If a project is instead managed by a few developers, the risk of abandonment and rug pull increases considerably.
Crypto multi-level marketing (MLM)
It is a marketing strategy that relies primarily on recruiting rather than actually selling products. Members earn rewards by referring other people, but the project never really produces value, compensating them from deposits from new customers.
You can spot an MLM Ponzi scheme by the aggressive marketing a project pursues without yielding an actual product.
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NFT Scam: 4 Ways to Spot a Cryptocurrency Ponzi Scam – The ₿log
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