Unveiling the Ponzi Scheme: From a Century-Old Classic to Crypto Reality, These Tactics You Must Know

What is a Ponzi scheme? Why does it keep happening despite being banned?

In the century-long evolution of financial scams, no deception has proven more resilient than the Ponzi scheme. This scam promises low-risk, high-return investment opportunities, precisely targeting investors’ dreams of wealth, but ultimately wipes out victims’ capital. From traditional finance to blockchain, variants of Ponzi schemes emerge endlessly, evolving into a global financial tumor.

The true face of a Ponzi scheme: using new investors’ money to pay old investors

The core logic of a Ponzi scheme is extremely simple and brutal—it does not generate profits through real business operations or investments, but continuously absorbs new investors’ funds to pay “returns” to early investors. Once new funds dry up, the entire system collapses instantly, and the fraudsters disappear with the remaining or most of the funds.

A scammer’s legend: How Ponzi created the “ultimate skill” in financial fraud

From criminal to “financial genius”

The name comes from Italian Charles Ponzi. In 1903, after sneaking into the US, Ponzi worked as a painter, laborer, and various other jobs. He was imprisoned in Canada for forgery and served time in Atlanta for human trafficking. After repeated blows to the American Dream, he realized that the fastest way to make money was not honest labor but financial fraud.

In 1919, just after World War I ended, the global economy was in chaos. Ponzi sensed an opportunity. He claimed he could make money by buying European postal notes and reselling them in the US, designing a complex and seemingly high-return investment scheme to sell to the public.

Celebration and collapse: 45 days promise of 50% return

This plan attracted about 40,000 Boston residents, mostly poor people dreaming of wealth, each investing a few hundred dollars. These investors had little financial knowledge, and even when some newspapers pointed out it was obvious fraud, Ponzi could counter with articles and set huge bait to keep attracting newcomers. He even boasted: investors could get 50% returns in 45 days.

When initial investors indeed received “returns” (actually the principal of later investors), they enthusiastically recommended it to friends and family, and the crowd rapidly grew. Until August 1920, when the scheme collapsed due to a liquidity crisis, and Ponzi was sentenced to 5 years in prison. Since then, “Ponzi scheme” has become the most famous term in financial fraud.

Nearly a century of mutations and upgrades: classic cases of Ponzi schemes

Madoff case: 20 years of meticulous planning and $17.5 billion instant evaporation

If Ponzi is the pioneer of such schemes, then Bernard Madoff is the master of this deception. This former NASDAQ chairman created the largest scam in US history.

Madoff’s brilliance lay in fully leveraging his identity and social circle. He infiltrated high-end Jewish clubs, developed “downlines” through friends, family, and business partners, and successfully attracted $17.5 billion into his carefully constructed Ponzi scheme at a snowballing rate. He promised investors a steady 10% annual return, even boasting he could profit easily in any market environment.

The truth was: these “returns” came entirely from the principal of new investors. Once many investors wanted to withdraw funds, the scam was immediately exposed.

During the 2008 global financial crisis, investors demanded about $7 billion in withdrawals due to market downturns, and Madoff’s scheme instantly unraveled. In 2009, he was sentenced to 150 years in prison for fraud, with total losses reaching $64.8 billion, involving thousands of victims.

PlusToken wallet case: a new blockchain-based Ponzi scam

If Madoff represents the pinnacle of traditional financial Ponzi schemes, then PlusToken wallet exemplifies an upgraded version in the cryptocurrency era.

According to a report by blockchain analysis firm Chainalysis, a scam gang called PlusToken defrauded about $2 billion worth of cryptocurrencies outside China, with $185 million successfully cashed out. This project claimed to be based on blockchain technology, promoting a mobile app in China, Southeast Asia, and other regions, promising monthly returns of 6%-18%, claiming these profits came from crypto trading arbitrage.

In reality, PlusToken was a pyramid scheme disguised as a “high-tech product.” Over more than a year of operation, it scammed funds from many “investors” with limited understanding of blockchain concepts. In June 2019, when users could no longer withdraw coins and customer service stopped, investors finally realized their money was lost. This case shows that Ponzi schemes have successfully “evolved” into the cryptocurrency field.

Identification and prevention: 10 must-know anti-scam tips

1. Beware of the deadly lure of “low risk, high return”

Any investment involves risk—this is the fundamental rule. Investment plans claiming daily 1% or monthly 30% returns are almost certainly Ponzi schemes. Such promises violate basic investment principles because no investment can generate such excess returns without risk.

2. Recognize the big lie of “zero risk, capital preservation, and interest”

In Madoff’s case, he promised investors an average annual return of 10% and emphasized “guaranteed investment, no loss.” But in reality, no investment is immune to economic fluctuations, and promising 100% guaranteed continuous profit is impossible. Any such promise should immediately raise your suspicion.

3. Be skeptical of “mysterious, complex, obscure” investment strategies

Scammers tend to deliberately complicate investment products and strategies, stacking jargon and obscure descriptions to create a “professional” appearance. But the truth is, these projects often lack real products or business support. If you cannot understand the basic logic of an investment, do not invest.

4. Demand transparent, detailed information from project operators

When investors ask project managers for specific information but get no clear response, or the other party makes excuses, this is a red flag. Legitimate investors should be able to clearly explain their business model, fund usage, and expected returns.

5. Use business registration systems to verify project legitimacy

Ponzi schemes often involve unregistered or illegally registered projects. You can check the company’s registration status on official business registration websites. If the project is unregistered or information is vague, be immediately cautious.

6. Watch out for withdrawal difficulties and various withdrawal obstacles

This is one of the most obvious features of Ponzi schemes. Scammers set up barriers to prevent withdrawals, such as increasing withdrawal fees, changing withdrawal rules at will, or delaying withdrawals with technical faults. If you find withdrawals becoming difficult, the scam may have already begun.

7. Recognize “pyramid” style recruitment schemes

If an investment encourages you to recruit friends and family and promises commissions or bonuses from their investments, this is a typical pyramid sales model—also a hallmark of Ponzi schemes. Any investment relying on recruitment to generate returns should be rejected.

8. Consult professional advisors before investing

If you’re unsure about a certain investment, the best approach is to seek help from professional financial advisors or investment consulting firms. They can help analyze risks and identify red flags. Don’t invest blindly just because you’re embarrassed to ask.

9. Research the background of the project initiator thoroughly

Ponzi scheme founders often portray themselves as geniuses. For example, Sergey Mavrodi, founder of MMM financial mutual aid, used a “hero” image to deceive the public. Before investing, thoroughly research the background, achievements, and reputation of the initiator to spot overly hyped “gurus.”

10. Always remember: “Pies don’t fall from the sky”

Scammers succeed because they precisely exploit human greed. They weave dreams of huge returns, making victims willingly invest. Stay alert, remind yourself: greed can cloud judgment. Maintaining a clear mind and sticking to principles can help you avoid becoming the next victim.

Conclusion: Ponzi schemes never go out of style; stay vigilant

From the Ponzi case in 1920 to Madoff in 2008 and PlusToken in 2019, Ponzi schemes have spanned over a century. Their forms continuously evolve—from traditional finance to internet finance, and now to cryptocurrencies—but the essence remains unchanged: using new investors’ money to pay old investors.

The key investment rule always applies: Risk and return are proportional. Any investment promise that violates this rule should be suspicious. Remember these ten prevention tips, keep a vigilant mind, and you can navigate the tempting financial world safely.