The Ponzi Scheme is nothing new in the field of cryptocurrencies. In 2015, the Security and Exchanges Commission (SEC) warned of perpetrators who abuse virtual currencies for this form of investment fraud.
How to recognize Ponzi Scheme in Crypto
Ponzi Scheme fraud can be recognized by “classic” warning signals such as promises of above-average returns. But other signaling metrics can also be observed on the blockchain that may indicate a Ponzi scheme.
The number of deposits and withdrawals in cryptocurrency is roughly a similar ratio. However, this is typically not the case with a Ponzi scheme. As an example, the BitConnect Coin (BCC) from 2018 is worth mentioning. This is one of the best-known and most extensive Ponzi schemes related to virtual currencies, with a volume of USD 2.4 billion. Based on the addresses identified, our analysis showed that out of over 800,000 transactions at BitConnect, only 4.59% were payouts.
However, the far lower number of payouts was consistently followed by the withdrawal of the existing capital, mostly to the initiators of the scam. That this can be a reliable indicator is also shown by the data on the GainBitcoin Ponzi scheme. There, payouts account for about 4.31% of all transactions.
Another indicator of a Ponzi scheme is that a large part of the available coins is concentrated on a small number of addresses and, thus, people. The HyperVerse Token (HVT) also fulfills this criterion. For example, one of the addresses alone holds nearly 40% of the tokens on the market.
One observation in connection with the HyperVerse Token is particularly interesting: the creator of the cryptocurrency can create new tokens at any time. This process is known as minting.
For example, in July 2022, new tokens were generated five times after the token’s price plummeted massively. After that, the corresponding tokens were sold by the creator.
The fact that this Ponzi scheme must be profitable is also shown by the fact that there are HyperVerse tokens on more than 24,000 different addresses, or “virtual accounts”. Accordingly, we can assume that there is roughly a similar number of potentially aggrieved parties.
But Ponzi schemes don’t always work. Analytical data suggests that the person or group who created the HyperVerse Token has failed in a lucrative fraud scheme several times. For example, the MiFa and HVVV tokens were bought by the creator and the other 22 buyers.
On-Chain Analysis of BitConnect and GainBitcoin
Thanks to blockchain technology, anyone can track transactions at any time. Therefore, to avoid becoming victims of a Ponzi scheme, interested parties can examine indicators on the blockchain that may point to Ponzi schemes before making a significant investment. The presumed most vital sign of a Ponzi scheme is the discrepancy between deposits and withdrawals.
Based on the fraud cases surrounding BitConnect and GainBitcoin, the payouts in the analyzed period account for between 4-5% of transactions, far less than deposits to the perpetrators’ addresses.
Also the fact when how much is deposited into the scam system is mostly similar. The following graph, which compares the deposits and withdrawals at BitConnect and GainBitcoin, shows this exceptionally well.
The above diagram also shows the life cycle of a Ponzi scheme in terms of daily transaction volume (DTV). The daily transaction volume is calculated from the sum of deposits and withdrawals into the Ponzi scheme on a given day. The life cycle of a Ponzi can be divided into three phases:
- Bootstrap: The DTV grows steadily with a relatively steeper increase leading up to hyperoperation.
- Hyperoperation: This phase consists of many cycles. In each cycle, the DTV grows nonlinearly, reaches a peak, and decays nonlinearly.
- Collapse: After that last decay of the last cycle in hyperoperation, the DTV decays steadily and approaches zero.
Off-Chain signs of a Ponzi-Scheme
Users should also consider other indicators before investing. For example, there is usually no whitepaper for a Ponzi scheme or, at best, an unclear one. The projects are typically advertised with massive marketing campaigns and remain non-transparent to the user. Also, in contrast to severe projects, the source code cannot be viewed publicly – if it exists.