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[GUEST BLOG] The Anatomy of a Ponzi Scheme

News
05 July 2020
South Africans are struggling financially and are often desperate. Everyone wants to believe there’s a way to get rich quickly, or perhaps just get out of financial trouble and back on their feet.
Crypto Scheme

Scammers have been around forever, and their latest favourite seems to have a Cryptocurrency (Bitcoin, etc.) or Forex (Foreign Exchange) flavour. 

Sadly, so-called Ponzi schemes (also known as pyramid schemes) have been rampant in South Africa for years. These are schemes where early investors get paid from the deposits of new investors, creating the impression that the program is indeed profitable. After some time, when new investors inevitably become scarce, the scheme collapses as there is no more new money to keep it going. Most people simply don't know enough about cryptocurrency and easily believe that such incredible returns can be offered and even guaranteed.

So how do you identify a Ponzi scheme? Signs to look out for include:

  1. The scam is often dressed up as an incredibly profitable trading program, either trading in crypto or Forex. These markets are held up to be so gigantic and liquid, that it is possible to run sophisticated AI algorithms via robots (or bots) that automatically trade day and night and magically make money for the owner.
  2. Promotional material will either explicitly or implicitly state the profitability of the programme. Promises of weekly returns of up to 5% are not uncommon. The truth is that such high returns are simply not realistic and more importantly, can never be guaranteed. When any programme claims to return more than 25% per year, alarm bells should go off.
  3. Oftentimes, the platform will show what appears to be real trades, made by the system and confirming the profitability. Sadly, this is no guarantee that the programme actually made those trades. In almost all cases these trades are fake and in fact created retrospectively - sometimes as recent as 5 minutes in the past, giving the appearance of real live trades.
  4. Typically, the platform will not be registered with the Finance Sector Conduct Authority (FSCA), and even though in some cases this is not a requirement, scammers will exploit such grey area, leaving their victims with little recourse. Furthermore, the team behind the programme will either be fake, not identified or worse, identifiable as having previous judgments, criminal records or past involvement in other dodgy schemes.

Especially nowadays, South Africans are struggling financially and are often desperate. Everyone wants to believe there’s a way to get rich quickly, or perhaps just get out of financial trouble and back on their feet.  We so desperately want this to be true that we lose our objectivity and common sense when offered a chance to supposedly make easy money. Scammers understand this weakness very well and prey on it. They come disguised as one of us and have no moral scruples about who they steal from.

As bleak as it is, always keep this in mind: if it sounds too good to be true, it probably is.


Written by: Earle Loxton, Founder & CEO of Digital Currency Index