Connect with us


Crypto Vs Ponzi Scheme: The difference



Many people are still wondering “what’s the difference between ponzi schemes and cryptocurrencies?”. Many have equally said that they are the same..

Well, we will try as much as we can to clarify you on that. Hopefully when you are done reading this post you will understand the difference between both.

Understanding the terms

According to Wikipedia A Ponzi scheme is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors. The scheme leads victims to believe that profits are coming from legitimate business activity (e.g., product sales or successful investments), and they remain unaware that other investors are the source of funds. A Ponzi scheme can maintain the illusion of a sustainable business as long as new investors contribute new funds, and as long as most of the investors do not demand full repayment and still believe in the non-existent assets they are purported to own.

Some of the first recorded incidents to meet the modern definition of Ponzi scheme were carried out from 1869 to 1872 by Adele Spitzeder in Germany and by Sarah Howe in the United States in the 1880s through the “Ladies’ Deposit”. Howe offered a solely female clientele an 8% monthly interest rate, and then stole the money that the women had invested. She was eventually discovered and served three years in prison. The Ponzi scheme was also previously described in novels; Charles Dickens’ 1844 novel Martin Chuzzlewit and his 1857 novel Little Dorrit both feature such a scheme.

In the 1920s, Charles Ponzi carried out this scheme and became well known throughout the United States because of the huge amount of money that he took in. His original scheme was based on the legitimate arbitrage of international reply coupons for postage stamps, but he soon began diverting new investors’ money to make payments to earlier investors and to himself. Unlike earlier similar schemes, Ponzi’s gained considerable press coverage both within the United States and internationally both while it was being perpetrated and after it collapsed – this notoriety eventually led to the type of scheme being named after him.

While A cryptocurrency, crypto-currency, or crypto is a collection of binary data which is designed to work as a medium of exchange. Individual coin ownership records are stored in a ledger, which is a computerized database using strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership. Cryptocurrencies are generally fiat currencies, as they are not backed by or convertible into a commodity. Some crypto schemes use validators to maintain the cryptocurrency. In a proof-of-stake model, owners put up their tokens as collateral. In return, they get authority over the token in proportion to the amount they stake. Generally, these token stakers get additional ownership in the token over time via network fees, newly minted tokens or other such reward mechanisms.

Cryptocurrency does not exist in physical form (like paper money) and is typically not issued by a central authority. Cryptocurrencies typically use decentralized control as opposed to a central bank digital currency (CBDC). When a cryptocurrency is minted or created prior to issuance or issued by a single issuer, it is generally considered centralized. When implemented with decentralized control, each cryptocurrency works through distributed ledger technology, typically a blockchain, that serves as a public financial transaction database.

A cryptocurrency is a tradable digital asset or digital form of money, built on blockchain technology that only exists online. Cryptocurrencies use encryption to authenticate and protect transactions, hence their name. There are currently over a thousand different cryptocurrencies in the world, and many see them as the key to a fairer future economy.

Bitcoin, first released as open-source software in 2009, is the first decentralized cryptocurrency. Since the release of bitcoin, many other cryptocurrencies have been created.

READ ALSO  Cryptocurrency trader shares his experience on how he lost all his money within 5 mins

The difference

Many Ponzi schemes share common characteristics. Look for these warning signs:

High returns with little or no risk. Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any “guaranteed” investment opportunity.

Overly consistent returns. Investments tend to go up and down over time. Be skeptical about an investment that regularly generates positive returns regardless of overall market conditions.

Unregistered investments. Ponzi schemes typically involve investments that are not registered with the SEC or with state regulators. Registration is important because it provides investors with access to information about the company’s management, products, services, and finances.

Unlicensed sellers. Federal and state securities laws require investment professionals and firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.

Secretive, complex strategies. Avoid investments if you don’t understand them or can’t get complete information about them.

Issues with paperwork. Account statement errors may be a sign that funds are not being invested as promised.

Difficulty receiving payments. Be suspicious if you don’t receive a payment or have difficulty cashing out. Ponzi scheme promoters sometimes try to prevent participants from cashing out by offering even higher returns for staying put.

READ ALSO  "Okonjo-Iweala And Sanusi Begged Us To Save But We Refused" - Peter Obi

Bitcoin does not meet most of the criteria for a Ponzi scheme

Bitcoins create real value.
At the core of Bitcoin-based systems are computations, which produce a real result. As opposed to the Ponzi scheme, there is work being done, and hardware involved in it..

There are no promised sky-high ROIs
As opposed to fraudulent schemes, there is no guarantee you will get your money back sevenfold. What you will gain from trading is entirely down to your competence, ability to handle feedback objectively, and making adequate decisions..

Security protocols
Given you are buying your Bitcoins from trusted sources, do business with the right people, and use things like KYC, your chances of being taken for a ride are minimal. The price can crash, but money is to be made on that too if you know what you’re doing. As far as the code is concerned, programmers are working non-stop on security ever since it has been invented..

There are independent auditors
Companies we have mentioned before and many others like ShuftiPro will make an independent assessment of a potential scammer, and if you’re not sure whether to trust Bitcoin or an exchange you can always find a market analytic who will help you choose a good strategy.

Blockchains Aren’t Built on Pyramids
There are many other reasons as to why Bitcoin can’t be considered a pyramid or Ponzi scheme, but these are some of the more obvious ones. Over time those who ignore these arguments will hopefully either educate themselves or realize that institutions such as Yale University, Morgan Creek, and Fidelity might have done their homework before investing in it. Don’t hold your breath though.

Follow us on social media: