In the crypto world, there are numerous investment opportunities. A typical crypto investor knows that blockchain technology and crypto technology’s innovative nature can unlock significant investment returns, especially when it comes to sectors destined to gain mainstream acceptance soon.
Regardless of size, Crypto scams have also become more common due to this common perception. It is very easy to present investors with exaggerated crypto investment recommendations given digital assets volatility and their underlying technology’s inherent complexity.
Therefore, the majority of crypto fraud schemes take advantage of the popularity of crypto assets, the chance of finding a new bitcoin, and a lack of primary education regarding how crypto works to scam investors. Here, the five largest crypto Ponzi schemes in history are showcased and discussed in detail, illustrating how they exploited cryptocurrencies’ volatility, complexity, and novelty. Until then, let us examine some of the most common characteristics of general crypto Ponzi schemes.
Cryptocurrency Ponzi scheme: What Is It?
Frequently, Ponzi schemes operate as elaborate investment scams designed to entice investors to invest by promising quick and high returns on a fictitious business. This company often concentrates on receiving funds from new investors for the purpose of disbursing them to existing investors in the belief that these funds are profit-making activities. The organisation falls apart as investment flows dry up.
The fraudsters behind crypto Ponzi schemes create fictitious crypto companies that entice investors with their stories and fake statistics. Crypto has the advantage of being relatively easy to market to those who lack a profound understanding of how it functions or are otherwise enthralled by its potential to generate attractive investment returns.
Ponzi schemes are historical and date to the early 1900s. But it wasn’t until the early 1920s that the illicit activities of Italian moneylender Charles Ponzi, brought this particular kind of fraud into the public eye. The Ponzi scheme has changed as a result of the technological advances, but these warning signs are common among them:
It promises a guaranteed return on investments, whatever the market condition. Such schemes are often presented as complex and illogical due to their investment models or operating processes underlying them. To protect the business and its investments, evidence of its legal and financial status are withheld from access by the company. These red flags are hidden by scammers who manipulate investors’ emotions. The Ponzi scheme survives today for this very reason, a century after the con artist who gave it its name.
Ponzi schemes and pyramid schemes differ from each other?
Pyramid schemes provide returns to previous investors through the influx of fresh capital, similar to Ponzi schemes. A Ponzi scheme is only differentiated by its marketing as an enterprise that sells goods or services to generate profits. Pyramid schemes, in comparison, do not attribute an enterprise’s performance to the supposed effectiveness of the procedure.
There are many similarities between pyramid schemes and Ponzi schemes, based on the same principle: unsuspecting individuals are cheated by unscrupulous investors claiming extraordinary returns in exchange for their money. Contrary to regular investments, these schemes can only offer consistent gains as long as the number of investors increases. The money also dwindles as the number of investors decreases. When monetary inflows match cash outflows, Ponzi and pyramid schemes are self-sustaining. Schemers offer their clients different products and construct their schemes differently, but both have the potential to be devastating if they go wrong.
Ponzi Schemes
In exchange for investors’ money, portfolio managers promise high returns. When those investors request a return, they are compensated with contributions from later investors. The person in charge of organising this type of fraud usually controls the whole operation; they transfer funds from one client to another without engaging in any investment activities. According to the SEC, an estimated $65 billion was lost by investors. Ponzi Mania was a period in late 2008 during which regulators and investment professionals sought out other Ponzi schemes.
Pyramid Schemes
In stark contrast, a pyramid scheme is based on an investor recruiting other investors. Investment opportunities, such as the right to sell a product, are presented as incentives. The person who recruited each investor receives a fee for the chance to sell the item. As part of the pyramid structure, the proceeds must be shared with those at higher levels.
A significant difference between pyramid schemes and Ponzi schemes is that pyramid schemes are more difficult to prove. Furthermore, corporations are better protected because their legal teams are more substantial than those protecting individuals. There has been controversy regarding the pyramid scheme of the nutrition company Herbalife (HLF). Their products still sell, and their stock price remains strong despite being labelled an illegal pyramid scheme and paying out more than $200 million in damages.
The Biggest Crypto Ponzi Schemes in History
Onecoin
Over a decade has passed since the launch of Onecoin. Since then, more transactions have taken place. Onecoin was promoted as the next big thing in cryptocurrency and marketed as the “Bitcoin Killer”, defrauding investors of $5.8 billion. There was an MLM underneath this “business venture,” where members received cash and Onecoins for recruiting new investors. Rather than on the marketing philosophy itself, the problem was that Onecoin lacked its blockchain. Investors thus acquired a worthless asset when they bought Onecoin because an established cryptocurrency did not back it.
Onecoin’s leaders were ultimately charged after the U.S. government warned investors away from the company. By that point, Ignatova had disappeared. OneCoin was started in 2014 by Ruja Ignatova, who claimed it worked like any other cryptocurrency. In a statement, OneCoins were claimed to be able to be mined (with 120 billion coins currently available) for payments and electronic wallets. Sadly, there was no OneCoin payment system or blockchain model.
There were educational materials, such as courses on cryptocurrency. They considered this to be their primary business. Other topics, such as trading and investing, were also covered in the studies. Multi-level marketing (MLM) was used for the classes, and buyers received rewards for bringing in more participants.
Participants in the course packages were supposed to receive tokens they could use to mine OneCoins. Course materials were said to be plagiarised to some extent. OneCoin exchange coins, an internal marketplace, were used to convert OneCoin into other currencies. Those who purchased more than the beginner package could access the conversation. According to the level of education package purchased, limits were placed on account balances.
A shutdown of the exchange took place in January 2017. A majority of withdrawal requests were denied by OneCoin prior to the shutdown. The only way affiliates could withdraw their funds was through conversation. OneCoin began to raise questions in 2016, when many countries began investigating the company, labelling it a pyramid scheme.
As early as March 2016, the Direct Selling Association of Norway labelled OneCoin a pyramid scheme. OneCoin was subsequently identified as a pyramid scheme by the Hungarian Central Bank in December 2016. During 2017, OneCoin claimed to be the first company to obtain a licence from the Vietnamese government and be permitted to use digital currency legally. Vietnamese officials disagreed with this assertion
A Bulgarian police raided the company’s offices early in 2018. Founder Ruja went missing in 2017 after being arrested on a warrant. In her absence, Konstantin Ignatov took over as the company’s face and manager. Kostantin was arrested in November 2019 as well as Greenwood in 2018. Kostantin pleaded guilty to the charges of money laundering and fraud. Greenwood is currently negotiating a plea deal with authorities. The OneCoins were never traded actively, nor could they be used for any purchases.
Bitconnect
A second major Ponzi scheme based on cryptocurrency, Bitconnect, began to operate as a cryptocurrency-based loan platform that promised daily returns of 20%. Owners were promised 40% returns every month. Satao Nakamoto, known by the pseudonym Satoshi, is the head of an unknown group of developers. Trading bots used escrow funds to trade, while investors locked their BCC tokens on the platform.
Among the first people to voice concern about Bitconnect’s poor return on investment were Ethereum co-founder Vitalik Buterin, Mike Novogratz, and Charlie Lee. Eventually, the scheme was noticed by the U.K. authorities. It was ultimately seen as a Ponzi scheme by U.S. authorities who demanded Bitconect shut down in 2018. BCC’s price dropped by 90%, resulting in losses of over $3.5 billion for investors.
BitConnect and BCC’s true identities remain a mystery, as they are associated with all Ponzi schemes. Indian citizens Satish Kumbhani, Mahendra Chaudhari, and Divyesh Darji were among the figures involved in BitConnect’s failure. John Bigatton, another Australian alleged BitConnect promoter, faces a charge of offering unlicensed financial services in connection with his involvement in BitConnect.
The disappearance of Bigatton’s wife after BitConnect’s collapse has nothing to do with BitConnect charges. The most notable figure associated with BitConnect, Carlos Matos, was not involved in its development and only engaged in public relations on others’ behalf. Matias lost $25,610 as a result of his investment in BitConnect. However, he was unaware of the Ponzi scheme nature of the investment.
With BitConnect, users can bypass banks and use cryptocurrency to solve real-world financial problems. There was 28 million BCC available as a notional maximum supply of the PoS (Proof-of-Stake) cryptocurrency token BCC. Mining was expected to provide 2.6 million BCC while staking activities from network participants were expected to add the remaining BCC.
Millions of investors participated in the scheme in late 2017. This led to its market cap reaching $2.5 billion, leveraging the altruistic arguments used by supporters of legitimate cryptocurrencies such as Bitcoin (BTC). BitConnect did not have a unique selling point since its foundation was identical to any other pyramid scheme. Bitcoin is provided with the expectation that interest will be worth the trouble almost immediately. The investor earns dividends by enticing other users to join and significant payouts.
In December 2017, BCC reached a high of $471 from a starting value of near zero. When the founders left the company, the token was almost worthless again two months later. In terms of illicit gains, BitConnect’s collapse in February 2018 was one of the biggest cryptocurrency scams in history, rivalled only by OneCoin and PlusToken. Since BitConnect’s website has been offline for a long time, the token’s “official” information is no longer available.
PlusToken
The biggest Ponzi scheme associated with cryptocurrency is PlusToken, the latest and largest assignment ever recorded. Scammers used the Chinese social networking application WeChat to market the scam, promising investors 10-30% returns per month. China, South Korea, and Japan were home to over 3 million PlusToken investors. Almost everything for the project was based on wallets and crypto literacy. As a means of increasing their profits, fraudsters eventually persuaded investors to buy the project’s token, PlusToken.
The PlusToken team shut the operation down in 2019 after stealing over $3 billion in cryptocurrency from investors.It was possible for authorities to capture key figures from the scheme, as they did with most Ponzi schemes described in this guide. The Chinese government seized cryptocurrency worth $4 billion in response to the scam. Unknown entities withdrew some of the stolen funds in 2020, indicating some of the individuals are yet to be identified.
Where Does BitConnect’s Ponzi Scheme Come From?
BitConnect and BCC’s true identities remain a mystery, as they are associated with all Ponzi schemes. Satish Kumbhani, Mahendra Chaudhari, and Divyesh Darji are among the Indians who were involved in BitConnect’s failure. John Bigatton, another Australian alleged BitConnect promoter, faces a charge of offering unlicensed financial services in connection with his involvement in BitConnect. The disappearance of Bigatton’s wife after BitConnect’s collapse has nothing to do with BitConnect charges.
The most notable figure associated with BitConnect, Carlos Matos, was not involved in its development and only engaged in public relations on others’ behalf. Investing in BitConnect resulted in Mateos’ loss of $25,610. However, he was unaware the scheme was a Ponzi scheme.
How Did the BitConnect Ponzi Scheme Work?
With BitConnect, users can bypass banks and use cryptocurrency to solve real-world financial problems. There was 28 million BCC available as a notional maximum supply of the PoS (Proof-of-Stake) cryptocurrency token BCC. Mining was expected to provide 2.6 million BCC while staking activities from network participants were expected to add the remaining BCC. Investors poured millions of dollars into the scheme in late 2017. By using more altruistic arguments, it reached a market cap of $2.5 billion, a higher value than Bitcoin (BTC).
BitConnect did not have a unique selling point since its foundation was identical to any other pyramid scheme. Bitcoin is provided with the expectation that interest will be worth the trouble almost immediately. The investor earns dividends by enticing other users to join and significant payouts. In December 2017, BCC reached a high of $471 from a starting value of near zero. When the founders left the company, the token was almost worthless again two months later.
With illicit gains rivalling only OneCoin and PlusToken, BitConnect’s collapse in February 2018 had the dubious distinction of being the largest cryptocurrency scam in history. Since BitConnect’s website has been offline for a long time, the token’s “official” information is no longer available.
GainBitcoin
An Indian cloud mining solution called GainBitcoin was launched in 2016 with the promise of 10% returns per month for 18 months. Indian investors invested no less than $300 million into the project despite the situation’s absurdity. The elaborate scheme was revealed in 2017 not to be backed up by any mining equipment or mining operations. In 2018, Amit Bhardwaj, the mastermind of the scheme, was arrested and charged with defrauding more than 8,000 investors. It is more likely than not that they will be adjudicated in favour of the investors, meaning that the investors will not be able to recover their losses.
Miner’s Max
The illegal activities of Mining Max are also disguised by an ostensibly legitimate cloud mining company. The platform advertised it as an avenue for investors to profit from cryptos’ hype. A multi-crypto mining framework, where high returns could be generated, was presented by Mining Max. Marketing campaigns of this Ponzi scheme relied heavily on marketing campaigns aimed at luring investors, just like any Ponzi scheme.
More than 18,000 investors from 54 countries have invested in Mining Max. The $250 million raised was only used to acquire mining hardware to the tune of $70 million. The remaining funds were used to finance the marketing campaign for Mining Max as well as the extravagant lifestyles of the company’s employees. Since the scam was discovered, the company’s president, vice president, and other co conspirators have remained at large. However, several suspects have been arrested and charged.
Final Verdict
We identified the top cryptocurrency Ponzi schemes in our expose. Fraudsters are preying on investors’ inexperience with crypto, the enticement of crypto technology as a new industry, and its reputation for wild price fluctuations. No matter how reputable the company you believe to be pitching the crypto investment strategy may seem at first glance, it is highly recommended that you perform due diligence whenever you see one. When it comes to avoiding investment scams, ensure that you take the necessary precautions. That way, you will identify red flags and avoid falling prey to them.
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