The crypto industry is full of investment opportunities. The average crypto investor is well aware that the innovative nature of crypto and blockchain technology can unlock high investment returns, particularly in sectors poised to attract mainstream adoption in the not-too-distant future.
It is this common perception that has also fueled the recurrence of crypto scams, both large and small. The rationale behind these is that it is possible to pitch fuzzy and unrealistic crypto investment solutions to investors because of digital assets’ famous price volatility and the inherent complexities of their underlying technology. Therefore, when devising strategies to defraud investors, most crypto scam projects capitalize on the growing appeal of crypto assets, the odds of discovering the “next Bitcoin,” and a general lack of public education regarding the basics of crypto technology.
In this guide, we will cover five of the most notorious crypto Ponzi schemes in the industry’s history and highlight how the actors behind them took advantage of the volatility, complexity and novel appeal of crypto. But first, let’s take a look at the defining characteristics of a crypto Ponzi scheme in general.
What Is a Crypto Ponzi Scheme?
A Ponzi scheme is usually an elaborate investment scam designed to lure investors with the promise of generating high and quick rates of returns off the back of a non-existent enterprise. More often than not, the company focuses on receiving money from new investors and distributing it to earlier backers, under the pretense that this money is profits accrued from a legitimate investment activity. Eventually, such a system unravels when the flow of new investments dries up.
In the case of a crypto Ponzi scheme, the fraudsters set up imaginary crypto enterprises and lure investors with various stories and pseudo-statistics. With crypto, it is somewhat easier to market unrealistic profits to an audience that does not deeply understand how crypto actually works or is otherwise dazzled by the potential of digital assets to generate alluring returns on investment.
Note that the history of Ponzi schemes goes way back to the 19th century. However, it was the illicit operations of Charles Ponzi, an Italian swindler, in the early 1920s that finally cast a spotlight on this specific type of fraud. Although Ponzi schemes have evolved along with technological advancements, they are often characterized by certain red flags:
- The promise of quick and risk-free investment returns, regardless of market conditions
- Investment models or business activities behind such schemes that are presented as allegedly too complex to explain.
- Withholding access to documents that could attest to the legitimacy and existence of the business and its investments
Unfortunately, Ponzi scheme operators know how to mask these red flags and manipulate investors’ emotions. This is why Ponzi schemes continue to thrive today, a full century after the swindler that gave them his name.
Are Ponzi Schemes Different From Pyramid Schemes?
A pyramid scheme is similar to a Ponzi scheme as the system relies upon the inflow of new investments in order to pay returns to earlier investors. The only difference is that a Ponzi scheme markets itself as a legitimate venture that generates profits by providing services or selling products. In contrast to this, pyramid schemes do not attribute the purported profitability of the scheme to the performance of an enterprise.
The Biggest Crypto Ponzi Schemes in History
Onecoin is perhaps the longest-running Ponzi scheme ever witnessed in the crypto industry. Founded by the Bulgarian fraudster Ruja Ignatova, aka Cryptoqueen, Onecoin managed to lure investors in their numbers between 2014 to 2019. During this period, the Ponzi scheme was said to have defrauded investors of $5.8 billion by marketing Onecoin as a “Bitcoin Killer” and the next hottest innovation in the crypto industry.
Beneath this “business venture” was a multi-level marketing scheme that compensated members with cash and Onecoin each time they onboarded new investors. The problem was not the marketing strategy per se but the fact that Onecoin had no blockchain of its own. So, whenever investors received or bought Onecoin, they held a worthless coin that was not backed by accepted digital asset technology.
After years of warning investors against investing in Onecoin, the U.S. government eventually cracked down on the company’s operations and levelled charges against its leaders. However, by this time, Ignatova herself had vanished into thin air.
Another major crypto Ponzi scheme, Bitconnect, launched in 2016 as a Bitcoin lending solution promising monthly returns of 40%. The operators were unknown developers headed by an individual named Satao Nakamoto, which is obviously a pseudonym. Investors had to purchase BCC tokens, lock them on the platform and wait while trading bots used their locked funds to trade.
Ethereum co-founder Vitalik Buterin, followed by Mike Novogratz and Charlie Lee, were the first prominent figures to criticize the unsustainable returns on investment promised by Bitconnect. It was not long before the scheme caught the attention of the U.K. government. Eventually, the U.S. authorities declared Bitconect a Ponzi scheme and demanded that it halt its operations in 2018. Subsequently, the price of BCC crashed by 90%, causing investors to collectively lose over $3.5 billion.
PlusToken is one of the latest and largest Ponzi schemes ever recorded in the crypto world. The scam conducted most of its marketing campaign via the Chinese messaging app, WeChat, by enticing investors with the prospect of generating 10-30% monthly returns on investment. PlusToken attracted over 3 million investors, a majority of which were located in China, South Korea and Japan. The entire business model of the project centered around crypto literacy and a wallet service. Ultimately, the fraudsters convinced investors to boost their earnings by buying the project's token, PlusToken.
After a year of fleecing investors of their funds, the PlusToken team closed down the scheme in 2019 and exited with cryptocurrencies worth over $3 billion. Like most of the Ponzi schemes mentioned in this guide, the authorities managed to arrest several of the scheme's lead actors. The Chinese later government confiscated $4 billion worth of crypto linked to the scam. However, it seems that not all the individuals involved have been traced, as unknown entities have successfully withdrawn some of the stolen funds in 2020.
In 2016, GainBitcoin emerged as an India-based cloud mining solution with the promise of generating monthly returns of 10% for 18 months. As ridiculous as this sounds, the project attracted no less than $300 million worth of investment from Indian investors. In 2017 it became clear that there was neither physical mining equipment nor any mining operations backing the elaborate scheme.
Fortunately, the scheme’s mastermind, Amit Bhardwaj was arrested in 2018 and charged for defrauding over 8,000 investors. From all indications, however, it seems that the case has fizzled out and it is very unlikely that the investors would recoup losses.
Like GainBitcoin, Mining Max also used an ostensible cloud mining venture to mask the true nature of its illegal operations. The platform promised investors an avenue to capitalize on widespread crypto hype. Mining Max pitched the idea of participating in a multi-crypto mining ecosystem, which had the potential of generating high returns. However, just like every other crypto Ponzi scheme, much of the business model relied on heavy marketing campaigns geared at attracting new investments.
In total, Mining Max lured over 18,000 investors across 54 countries. Of the $250 million raised, only $70 million was spent on purchasing mining hardware. The remainder of the money was used to fund the Mining Max marketing campaign, as well as the exorbitant lifestyles of its team members. Although several suspects linked to this scam have been arrested and charged, the company’s chairman, vice-chairman and other co-conspirators remain at large.
From our exposé of top crypto Ponzi schemes, it’s clear that fraudsters prey on investors’ lack of crypto education, crypto’s allure as a new technology, as well as its reputation for wild – and potentially highly profitable – price fluctuations. The takeaway is that it is highly advisable to carry out due diligence whenever you are faced with a crypto investment opportunity, no matter how reputable you may at first think the company pitching it is. Taking care and due caution are the best way to identify red flags and ensure you don’t fall prey to the – unfortunately numerous – investment scams out there.