This is a critical read for investors and individuals. So many times we see any investment project refered as a "Ponzi scheme", so many believe it's a term used to describe an investment project where the creator run away with investors' funds. But, that's not what ponzi scheme actually mean.
So what is a ponzi scheme?
A ponzi scheme is a scam that pretends to offer sound investment opportunities in the hope of attracting new investors. It's a calculated and predetermined type of scam that offers enticing returns to investors from the money taken from others in a well calculated and predetermined manner. In this kind of business, the investment company has no actual product or other purpose than to exploit new money from new people coming into its group. It's a business that only exists to trick the victims.
So what exactly does such investment companies doing, you ask?
In this kind of business, the investors are promised a certain percentage of ROI either daily or monthly. The business usually come in a fixed investment deposit. Return on investment is determined based on the number of depositors and investors joining the business. The ROI are paid from for from the money coming from new investors.
Most people understand this already, but there are many like my wife who still don't understand how a Ponzi scheme works. If you belong to this category get a bowl of popcorn and sit tight as I explain deeply how ponzi schemes are runs.
Let's break it down bit by bit for easy perusal using a monthly investment and ROI as our example.
Month 1
The investment company advertise their investment plan usually with an unsustainable ROI of 20% per month.
First person invests $100 with the expectation to earn a 20% of his investment for the month.
The company keeps the $100 in their account, and pays $20 to the first investor as promised. This leaves the company with $80 in their account.
Satisfied of the ROI received, the first investor start telling others about the investment bringing more people to invest in the company.
Month 2
2 more people join the program and invest $100 each into the company. This brings the company account to $290.
At the end of the month, the company pays the 3 investors a total $60 as ROI for their investment for the month. That leaves the company with $210 in their account.
Month 3
Persons one, two, and three are all satisfied. They each bring two new people, resulting in the recruitment of six new investors.
The Six additional investors each put $100 into the company. The company account now has $810 on ground.
From the $810, the company pays the nine investors the promised return $180, balancing $630. The cycle continues as they keep bringing in more investors, distribute some money to everyone, and keep everyone satisfied.
But, here is where it goes wrong
At this point the company will need to pay the 9 investors $20 each every month. Without the new people coming into the company, the $630 in their account will last 3 months with $90 balance.
Now, if any of the investors decided to leave the program they will need to withdraw their funds which further reduces the company balance. To stay afloat beyond the 3 months they must bring in new people.
At this point, the company start doing promotions for referrals to get new people who will bring in new money into the company account. But if this doesn't work, the company will run out of money.
The company will then run out of investor's and run off into thin air leaving those who joined later in the cold, clueless of what has happened to their investment. That's how a Ponzi scheme usually come to an end.
In crypto we see plenty of such ponzi schemes that exist in the ecosystem, and they are as popular as ever. In fact, they have been around for as long as crypto has existed. The question then, is "What can we do about it?"
Solution 1 – Stop looking at the return on investment.
To solve this firstly, people need to understand that ROI means very little to a crypto business. Investors should not look at this number in crypto, or any investment for that matter. Instead they should look at the company objectives, or long term goals, and company strategy for building a product or company.
We see how ponzi schemes run because companies make it appear that this ROI is the main factor in the decision to invest in a company. The truth is that the company must have a viable strategy, or plan to get to the point of offering such high returns. And as long as the ROI is not seen to be sustainable, the business will always run off.
Solution 2 – Understand what you are offering
Doing some basic research on the company will make sure that you understand what you are getting into. As it is stated, there will be no profit until the business takes on board the first investor. Do the math and understand that this will take time to achieve, and the growth rate can be very slow. This is why, in the first stages of an investment, investors need to understand what the product or service does, and how it helps their goals.
With the two solution proffered above you should be able to identify a potential ponzi scam and to avoid them. Don't be like my wife who failed to do any research nor listen to me when I told her to keep her $20 away from a possible ponzi scheme. Learn what you are buying, know the potential downsides, and understand what you are getting into.
Conclusion
Ponzi schemes will always be around in crypto ecosystem, but as with all things crypto, there are good ones and bad ones. Be more discerning in your research before you open an account with a crypto investment platform, and do not be easily persuaded by a quote or mouth watering ROI numbers that are always touted at crypto companies. Your money will be at risk, and you should have a good understanding of what that is.
Thank you for reading.
Posted Using LeoFinance Alpha
