CC#013 - The Big P's in Crypto.

'You know crypto is a Ponzi scheme, right'?

Ponzi.

The word, effectively synonymous with the phrase ‘it’s a scam’, is often levelled at crypto investors to strike fear into their investment decisions.

If there is one thing that popular consciousness knows about the word ‘Ponzi’, it’s that it’s not a good thing.

For this reason, investors know to avoid the hallmarks of Ponzi schemes, from multi-level marketing systems with no fundamental business basis to investment schemes which seem to generate too ‘good to be true’ returns.

It may surprise you to learn that the concept of a Ponzi scheme is not modern and not unique to crypto.

The largest Ponzi in history was a securities scheme worth $65 billion when it collapsed after running undetected for over four decades alongside some of the best financial minds.

When it collapsed, more than thirty-seven thousand investors lost money, including prominent celebrities such as Steven Speilberg, Larry King and Kevin Bacon.

The scheme looked great on paper. It had been established by a former chairman of the NASDAQ, Bernie Madoff, and had generated fantastic returns from its first day. It had been greenlit by regulators, investment managers and even pension funds.

Spotting a Ponzi scheme is easy in hindsight but very difficult ahead of its inevitable collapse. During its operation, the founders are usually the only people who know that they are operating a Ponzi. Everyone else - especially the investors - is (usually) entirely in the dark.

But what exactly is a Ponzi scheme? Or a pyramid scheme?

Before I answer those questions, let’s examine if crypto or even individual projects within crypto (I’m looking at you, Bitcoin) resemble either of these fraudulent schemes, along with the fifteen most common warning signs to watch out for!