Sometimes, a coin developer will offer a guaranteed pricing for their coin, promising to buy the coin for a certain price no matter what happens in the market. This is one of the main selling points for the coin called Paycoin and it ended with a large fiasco because a coin whose developers are guarantying buyback at a certain price is likely to be a Ponzi scheme.
The essence of a Ponzi scheme is that investors get paid out of the money that the scheme is getting from new investors, not from legitimate business activities. A company that is running a Ponzi scheme would often spend all its resources and energy on attracting new investors because that’s where all the profits are coming from. When the flow of new investors stops, the scheme usually falls apart.
A Ponzi scheme typically promises returns much higher than the market average and describes the activity of a company or individual in very vague terms, such as “hedging trades of the futures” or “high-yield investment activities.” Initially, promoters of Ponzi schemes do pay the returns that they promised and turn early customers into big fans of the enterprise. These customers start telling about their investment to their friends and family and an influx of new investors begins. With it comes a cascade effect, early investors get paid out of the money that the enterprise gets from the new investors and the Ponzi scheme starts to grow very quickly.
Many of the early investors choose to not withdraw their money out of the scheme and hope that it will keep growing. Because of this, Ponzi scheme operators often don’t pay that much to investors. They simply send statements that indicate astronomical profits and growth rates, showing how much the investors have earned.
Sometimes, promoters would ask original investors for more money or promise to pay even higher returns in exchange for agreeing to not withdraw funds from the venture for a certain period of time.
If a government doesn’t stop a Ponzi scheme, it typically ceases to exist for one of three reasons. First, the creators of the scheme suddenly vanish with all the funds. Second, once the speed of new investments slows down, a Ponzi scheme may crash because it has no money to pay the promised returns. Third, a Ponzi scheme crashes when too many investors decide to ask for their money for whatever reasons, be it personal need, slowdown of the economy or something else.
Ponzi Schemes in Cryptocurrency Markets
While cryptocurrencies do bring a lot of benefits and freedoms to the market, one thing they don’t change is the law of supply and demand that governs the price of cryptocurrencies just like it governs the prices of products and services in free markets. Because of this law, markets are often volatile and prices can change significantly. There is no way for anyone to know or guarantee the behavior of a certain coin or network.
Even though the world of cryptocurrencies is new, it already had a few boom and bust cycles just like the stock market or any other market. These cycles are the nature of the markets, including cryptocurrency markets.
One of the ways scammers frame Ponzi schemes in cryptocurrency markets is “$X + $Y,” where $X is the original price and $Y is yield. The addition of a yield implies some kind of investment and return to the original investor. In reality, most of the cryptocurrency companies are very risky ventures that are not safe haven investments and the entire positioning in the form of an original price and a yield is very deceptive. However, such initial coin offerings sometimes do pop up and naïve investors not familiar with the history of financial scams do fall for them. Many cryptocurrency forums even have special sections for such coins and ICOs.
In addition to knowing about schemes that you absolutely need to avoid, you need to be aware of good practices in the world of cryptocurrencies. One of such practices is developers signing their releases with a PGP key. Once a developer signs a release, you can verify it using a service like www.toolsley.com
PGP is short for Pretty Good Privacy. It is an encryption program that makes data communication safe. With PGP, users can sign, encrypt and decrypt files, texts, communications, and even entire disk partitions.
PGP uses a number of cryptography systems and algorithms, including public-key cryptography, data compression, and hashing.
The reason why security is so important is simple: with cryptocurrencies, you are dealing with money. Just like when you are obtaining regular paper fiat money you want to be sure that the money is not counterfeit, you want to be sure that a cryptocurrency wallet you are downloading comes from the developers and has not been hacked and replaced by attackers that will get access to all your coins once you place them in your wallet.