Beware the Crypto-Ponzi schemes

Some people lost their entire life savings in these schemes. So please be vigilant, and if something sounds too good to be true, it probably is!


There are around 20,000 crypto-currencies online, and we hear about a new one daily. Essentially, these are currencies that exist digitally and use cryptography to make their transactions secure.

They have been massively popular because many people earned loads of money from these currencies, thus boosting their allure of making a quick buck without effort. As you might have guessed, they also come with substantial risks since it is not always clear who is behind them and whether their intention is genuine.

Furthermore, they tend to be highly volatile. When Elton Musk, the owner of Tesla, tweeted a message which indicated a fallout with the most popular cryptocurrency, Bitcoin, its value decreased by 4% in a few hours. Other cryptocurrencies followed suit.

But let’s look at the story of a particular crypto-currency called OneCoin. It was created around 2014, and the owner Dr. Ruga Ignatova claimed that it would grow to beat bitcoin in a few years. OneCoin had all the features of traditional crypto-currencies; an e-wallet, an exchange, and coin mining. An e-wallet stores digital coins, similarly to a physical wallet that holds physical coins. The role of the exchange is to change OneCoin coins into legal tenders such as Euros or Dollars. Coin mining is the process of verifying transactions and creating new digital cash. Furthermore, OneCoin promised to be simple, swift, and secure for financial services since the process does not involve intermediaries (like banks) which charge hefty commissions.

Dr. Ignatova also organized and attended several seminars worldwide where she assured people that any investment in the coin would give them a threefold return. She also promised that if they took part in the packages mechanism, the commission alone would make them billionaires overnight. The virtual currency eventually gained popularity in a short period reaching more than 195 counties across the globe. Since the coin’s value was rising due to increased demands, investors were holding onto their virtual cash in the hope of higher returns.

The company also offered educational material packages besides selling directly to consumers (like other crypto-currencies).

Whoever bought these packages received tokens used to mine for virtual coins. The xcoinx exchange allowed investors to withdraw their money but limited the possible transactions one could perform. The only way to ease these limitations was to purchase more packages. These also formed part of a different mechanism since investors could sell the packages to family and friends for a commission. But all of a sudden, things took a strange turn.

In 2016, just two years after the launch and without prior notice, the exchange became temporarily unavailable for a couple of weeks. The reason given was due to maintenance works. Of course, this was the first alarm bell since, all of a sudden, investors discovered that they couldn’t withdraw their money. When it opened again, they realized that most transactions were failing, but they didn’t think much back then!

However, in 2017, the xcoinx exchange closed for good, and no one knew what was happening. The United States Department of Justice launched an investigation establishing that the company had generated almost $4 billion in revenue. The company took the money paid to investors from these funds since there seemed to be no other source of income. So essentially, new investors were financing the payments of other investors in a typical Ponzi-scheme fashion. The so-called educational packages at the heart of the scheme were nothing more than plagiarised materials downloaded from the internet. Investigators later discovered that the xcoinx exchange was made up of internal servers only not linked to a proper blockchain system. The repercussion of this is that there weren’t adequate records that tracked transactions on the blockchain; thus, no one could check them from outside the company. It also meant that coin mining was impossible with such a system, and the tokens they provided to members were fake, having no value.

Eventually, the FBI shut down the operation and took many people into custody. The so-called investors lost massive amounts of money. Dr. Ignatova, the face and brains behind the scheme, disappeared. Some claim that she was kidnapped or killed by shady financial investors. Others believe that she managed to escape.

We might never get to the bottom of what happened. What’s important to keep in mind is that these rich-quick schemes are sometimes too good to be true. It does not mean that all crypto-currencies are Ponzi schemes. Far from it, many reliable virtual currencies have been operating for years. However, one has to be cautious. People shouldn’t just drool at the sound of a new crypto-currency. They should be wary of the ‘FOMO’ (Fear Of Missing Out) phenomenon whereby investors are keen to get in early on opportunities whose value might increase later. These scammers are experts at growing expectations by fuelling speculation.

Most importantly, it is crucial to understand how a system works before joining it.

Some people lost their entire life savings in these schemes. So please be vigilant, and if something sounds too good to be true, it probably is!

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