Not many know the above person’s face, but many have heard of his name mentioned in passing. That is Charles Ponzi. He was a great humanitarian! He relieved people from the burden of having money! He showed people how to get rid of their money through an elaborate postage stamp investment scheme. An innovation so inspiring, that your favourite internet investment guru has probably remixed his methods. In all seriousness, he is mostly known as the con artist who inspired the term “Ponzi scheme”. Previous investors are paid money using the newer investors' money, not from the backing of legitimate products or services.
This type of pyramid scheme is all too familiar in the world of cryptocurrencies. Terra (UST) is a stablecoin that took a massive tumble in May 2022, it is seen as a “Ponzi-like” scheme by many crypto-enthusiasts and critics alike. UST was anchored to the LUNA utility token which had internal dynamics that proved to be detrimental. The algorithm supposedly promised a 20% yield for investors. The price of Terra UST lost 99,9% of its value in about a week, wiping out billions of dollars in market capitalisation. Yikes! Keep in mind that this flop is not representative of all cryptocurrencies/blockchain/web3 projects.
There will always be scams like this coming out. Here are a few red flags to note:
- High returns with very little risk? Sounds like a scam to me! Any investment comes with some degree of risk, and usually, the ones with higher returns have more risk involved. So if someone is guaranteeing you a high return, be very suspicious!
- Be wary of investments that always generate positive returns, regardless of the overall market conditions. Investments usually go up and down over time, so if something always goes up, then I have some magic beans to sell you!
- Unregistered investments? Here there be dragons! Ponzi schemes typically involve investments that are not registered with your usual finance provider regulators. Registration is important because it provides you, the investor with mandated access to information about the company’s management, products, services, and finances.
- If you're looking to throw away your money, invest with an unlicensed seller! They're not registered with the appropriate authorities, so they can and will do whatever the hell they want with your money. Most Ponzi schemes involve unlicensed individuals or unregistered firms, so take this as a massive warning!
- If you don't understand something, or can't get information about it, it's probably best to avoid it. Especially if it's esoteric and complicated junk that requires you to open your third eye to financial freedom or Voodoo mathematics that leaves your head in a tizzy. Keep it simple!
- If you're having trouble cashing out, it might be because the person running the show is trying to keep everyone's money for themselves! They might offer higher returns to keep people from withdrawing their cash, so be suspicious if you're not receiving payments as expected.
- No actual valuable product backing these investments. We humans do not have the divine power to make something out of nothing. Even people who practice sorcery require a sacrifice or some sort of work to cast spells. So, we have to substantiate our investments with real things, not wishful thinking.
Be aware of a scheme that looks too good to be true, because it is highly likely that you are not beating the market. Take care and keep your eyes open.