Investor Must-Read: Identifying Ponzi Schemes in Financial Traps

Every year, tens of millions of people are deceived into a seemingly glamorous investment dream, only to lose everything in the end. These financial traps come in various forms, but almost all originate from the same ancestor—the Ponzi scheme. Although these scams may seem complex, once you master the identification methods, you can stay away from these harvesting mechanisms.

How Ponzi Schemes Work: The Story Starting from a Con Artist

The name “Ponzi scheme” comes from an Italian man, Charles Ponzi. In 1903, after illegally entering the United States, Ponzi tried various jobs—painting, miscellaneous work, and even served time in Canada and the US for forgery and human trafficking. It wasn’t until he discovered that finance was the fastest way to make money that he found his true path.

In 1919, just after the end of World War I, the global economy was in chaos. Ponzi saw this opportunity and claimed he could profit by buying European postal notes and reselling them in the US for a profit. He carefully designed an investment plan promising high returns and promoted it to Boston residents. In just one year, about 40,000 Boston residents—mostly low-income individuals eager to turn their fortunes around—became involved, each investing a few hundred dollars on average.

Ponzi promised investors a 50% return within 45 days. Once early investors tasted success, later ones flocked in. But all these returns didn’t come from genuine investment profits; instead, they were paid using the principal from new investors—this is the essence of a Ponzi scheme: the money from latecomers sustains the early investors; once new funds stop flowing, the entire system collapses immediately.

In August 1920, Ponzi’s plan collapsed. He was sentenced to five years in prison for fraud. The term “Ponzi scheme” was thus born, becoming synonymous with financial fraud. Since then, this pattern has been repeatedly packaged under new names and continues to deceive people to this day.

Three Classic Cases That Can Change Your Life

Madoff: The Largest Scam in U.S. History

If Ponzi was the inventor of the Ponzi scheme, then Bernard L. Madoff was the perfect executor of this model. As a former NASDAQ chairman and a well-known Wall Street financier, Madoff had a natural trust foundation. He infiltrated high-end Jewish clubs, gradually recruiting friends, family, and business partners through introductions, expanding like a snowball.

This scam lasted for 20 years. Madoff assured investors of a steady 10% annual return and boasted that he could profit easily whether markets rose or fell. Such claims violate basic investment principles—any real investment is affected by economic cycles; there is no such thing as a “win-win” market all year round.

Until the 2008 global financial crisis, investors withdrew about $7 billion, causing the capital chain to break immediately. After the scam was exposed, investigations revealed that Madoff had successfully attracted $17.5 billion in investments into his meticulously fabricated accounts. Subsequent estimates put the total loss at up to $64.8 billion. In 2009, Madoff was sentenced to 150 years in prison for fraud.

PlusToken: A Ponzi Scheme in the Blockchain Era

If Madoff represented Wall Street’s financial scams, then PlusToken wallets represented a new twist in the era of internet finance. This app, claiming to use “blockchain technology,” was widely promoted in China and Southeast Asia, promising users monthly returns of 6%-18%, claiming these profits came from cryptocurrency arbitrage trading.

In reality, PlusToken was just a traditional pyramid scheme disguised with the “blockchain” fancy label. In June 2019, when users could no longer withdraw funds and customer service stopped, the truth was revealed—this was a carefully designed capital harvesting scheme. According to a report by blockchain analysis firm Chainalysis, scammers stole about $2 billion worth of cryptocurrencies, with $185 million already sold off.

How to Recognize a Ponzi Scheme: Three Key Signals

So, how can ordinary investors identify these traps? The key lies in grasping the essential features of Ponzi schemes:

Signal 1: Promises of unrealistically high returns that defy investment norms

All investments carry risks. If an investment promises daily returns of 1% (monthly about 30%) without detailed risk disclosures, it’s a red flag. Genuine returns are proportional to risk—high returns require high risk. Promising “low risk, high return” is a fairy tale.

Signal 2: Emphasis on “guaranteed profit” and “zero risk”

Madoff attracted investors with promises like “investment guarantees no loss.” But all assets are affected by macroeconomic fluctuations; there’s no such thing as a completely zero-risk investment. Projects making such claims are either deceiving you or lack basic financial knowledge.

Signal 3: Complex projects with opaque information

Scammers like to use complicated, obscure terminology to package their projects, making it hard for ordinary people to understand. When you ask specific questions, they either dodge or hide behind “trade secrets.” Legitimate investment projects disclose detailed product structures, risk factors, and operational mechanisms—this is a legal requirement and a sign of trustworthiness.

Ten-Step Self-Help Guide: How to Avoid Ponzi Schemes

Step 1: Stay sensitive to benchmark cases

When you see a project claiming to generate a stable annual return of over 25%, think of Madoff’s 10% promise; when you see multi-level referral commissions, think of PlusToken’s Southeast Asia promotion. Historical scams are the best lessons.

Step 2: Ask about risk factors

If an investment advisor talks endlessly about high returns but avoids discussing risks, it’s a red flag. Any compliant investment must proactively disclose risks. If they dodge this, they are either unprofessional or have something to hide.

Step 3: Verify project legitimacy

Check through business registration systems, securities regulatory commissions, etc.: Is the project company genuinely registered? Does it have relevant licenses? Does its scope include the investment business? These seemingly dull tasks often reveal scammers’ true nature.

Step 4: Assess withdrawal difficulty

A typical Ponzi feature is setting withdrawal obstacles—raising fees, changing withdrawal rules, delaying payments. If you find withdrawals becoming increasingly difficult, it’s already a final warning.

Step 5: Examine the identity of referrers

When acquaintances strongly recommend an investment, ask yourself: Is this person an investment expert? Or just someone earning commissions for bringing you in? If it’s the latter, you’ve fallen into the “referral fee” trap—classic Ponzi trait.

Step 6: Compare with market benchmarks

Know what the normal returns are for similar assets. If an investment promises returns far exceeding the market average, be cautious. For example, current bond yields are around 3%-5%; someone promising 30% annualized is speaking loudly.

Step 7: Check operational records

Genuine investment projects openly disclose performance reports, financial data, and operational updates. If a project never reveals this info and only relies on stories and promises, it’s a typical “shell” company.

Step 8: Seek second opinions

When unsure, don’t rush to invest. Consult independent financial advisors, lawyers, or finance professionals and listen to their opinions. It may cost a bit, but it’s far less than losing everything to a scam.

Step 9: Research the founders’ backgrounds

Ponzi schemers often portray themselves as “geniuses” or “heroes”—Ponzi, Madoff, and even PlusToken’s masterminds all do this. Check their real backgrounds, past records, and industry reputation. A true investment master doesn’t need frequent appearances or excessive self-promotion.

Step 10: Conquer your greed

And most importantly, beat your inner greed. Ponzi schemes succeed repeatedly because they exploit human greed. When you hear “30% monthly returns,” that excitement often overrides rational judgment. Remind yourself: There’s no free lunch in the world; high returns always come with high risks, and guaranteed safe investments only exist in scammers’ stories.

Conclusion

From Charles Ponzi to Bernard Madoff, and to the masterminds behind PlusToken, Ponzi schemes have evolved over more than a century, constantly changing disguises. But no matter how they are packaged, their core remains the same: using new investors’ money to pay earlier investors. Once fresh funds stop flowing, the whole system collapses.

The key to recognizing and avoiding Ponzi schemes is to deeply understand this principle, and whenever faced with an investment opportunity, ask yourself: Where does the return come from? Is it genuine business profit, or is it from the principal of new investors? If the answer is the latter, regardless of how the project is packaged, you should stay far away. Always remember this iron law: Risk and reward are proportional; greed is the most expensive tuition fee.