Is Cryptocurrency Nothing But An Elaborate Ponzi Scheme?

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According to a survey from BanklessTimes.com, a third of the U.S. population believes digital assets are Ponzi schemes.

Ponzi schemes usually involve someone promising high returns on investment but using money from new investors to pay off old investors. Many people think cryptocurrencies are Ponzi schemes because they also promise high returns on investment.

“A Ponzi scheme is only sustainable as long as enough new investors are coming in to keep the scheme going,” BanklessTimes CEO Jonathan Merry said. “When that stops, the whole thing collapses. Bitcoin is not a Ponzi scheme because it does not rely on new investors to keep it going. Instead, Bitcoin relies on its own technology and network effects to maintain its value.”

Key points

Ponzi schemes are scams in which fraudsters use money from new investors to pay rewards to the existing ones, without ever generating any revenue.
Bitcoin is a high-risk investment, but it has many traits that do not chime with being a Ponzi scheme or a scam.

Ever since people first began to invest in Bitcoin (BTC), skeptics have lined up to label it a Ponzi scheme. The thinking is that Bitcoin doesn’t actually do anything, so the only way its value can go up is if people buy more of it and push the price up. But does that make it a Ponzi scheme? Let’s dive in and find out.

What is a Ponzi scheme?

A Ponzi scheme is an investment scam that uses funds from new investors to pay high rewards to the existing ones. It’s named after Charles Ponzi, who conned a number of investors in the 1920s. Unlike a real investment, the fraudster doesn’t actually invest money or do anything to generate revenue.

Let’s say you were an early entrant into a Ponzi scheme, and put in $500 with a promise of gaining a 20% APY. The scammer would use your $500 to pay the interest on other people’s so-called “investments.” He or she would then need to convince more people to put in more money, and use that to pay you. But eventually there wouldn’t be enough new money coming in, the scam would unravel, and your $500 would have disappeared.

The most famous crypto Ponzi scheme is probably OneCoin — a supposed cryptocurrency that didn’t even have a blockchain behind it. The swindlers tricked investors around the world out of over $4 billion. Ruja Ignatova, the main figure behind OneCoin, disappeared and has never been caught.

How does this apply to Bitcoin?

The easiest way to answer this question is to look at some of the SEC’s definitions of Ponzi scheme red flags and see how Bitcoin adds up.

1. High returns with little or no risk

Bitcoin has generated high returns in the past, but few crypto investors think there’s little or no risk involved. For sure, if you’d invested in Bitcoin five years ago, you’d be up over 700% today — in spite of the recent crash. However, this wasn’t in any way guaranteed. This is still a relatively new and unregulated asset class and there is a lot of uncertainty about what will happen next.

2. Overly consistent returns

If Bitcoin were a Ponzi scheme, investors would be receiving regular payouts from somewhere. In truth, the value of Bitcoin is anything but consistent and its price can swing wildly. It isn’t uncommon for Bitcoin to gain or lose 20% in a single day.

There are platforms that pay steady APYs on Bitcoin. Indeed, it would be fair to question whether any of the platforms paying crazy high returns on crypto deposits are Ponzi schemes. But to level this accusation at Bitcoin would be the same as calling the dollar a Ponzi scheme because some scammers use it as a form of payment.

3. Unregistered investments and unlicensed sellers

The SEC says, “Ponzi schemes typically involve investments that are not registered with the SEC or with state regulators.” This is an area where crypto does run into more troubled waters. It is relatively unregulated, and only a few cryptocurrencies have registered with the SEC as investments. Most cryptos are regulated by the CFTC (Commodity Futures Trading Commission), as they are treated as commodities rather than investments.

In terms of the sellers, some crypto exchanges are not fully licensed. But there are also a number of top crypto exchanges that work hard to stay on the right side of regulators. Crypto platforms in the U.S. have to have something called a money transmitter license. It isn’t the same as being an SEC-authorized investment firm, but it’s also not totally unregulated.

Just because it’s risky, doesn’t make it a scam

Many crypto investors bought for the first time last year. And a number of them — me included — are looking at significantly devalued portfolios right now. Some individual cryptocurrencies are down 90% or more from their all-time highs. These prolonged price drops have caused some investors to wonder if the naysayers were right all along. Which is entirely understandable.

Did we all just fall victim to an enormous scam? Unlikely. Not least because if Bitcoin were a scam, there’d be a nefarious person or people behind it actively profiting from the scheme. One of the core premises of Bitcoin is that it is decentralized — there is no middleman. That isn’t to say that crypto hasn’t attracted its fair share of sketchy characters. It absolutely has. It’s just that the digital currency itself doesn’t fit the definition of a Ponzi scheme.

Put simply, there’s a huge difference between putting money into a high-risk investment and actively being scammed. For starters, there’s a good chance Bitcoin’s price will eventually recover, meaning the investment could eventually come good. Plus, there’s no Charles Ponzi-style figure tricking people into buying Bitcoin for his or her personal gain.

Bottom line

People who invest in Bitcoin do so because they hope it might prove transformative. Some see it as a form of digital gold, and others believe it could eventually become the currency of the internet. It could also capture a significant chunk of the lucrative remittance market. The challenge is that Bitcoin might not achieve any of these things. It is a highly speculative asset and the industry is in its infancy. There’s a chance quantum computing or strict regulation could stifle the digital asset market before it has a chance to fully develop.

Nonetheless, the dramatic price drop and onset of crypto winter does not mean we can call Bitcoin a Ponzi scheme. Whether it can achieve everything Bitcoin believers believe it might is another question entirely.

BanklessTimes points out that while cryptocurrencies do have some similarities to Ponzi schemes, there are a couple key differences:

Both promise high returns, but while a Ponzi scheme is not sustainable, cryptocurrencies are built to last.
Cryptocurrencies are decentralized and not controlled by any person or organization. This makes them much more resistant to collapse than Ponzi schemes, which rely on new investors to keep them going.

And unlike Ponzi schemes, cryptocurrencies are transparent, and their code is open source. This allows anyone to audit their code and verify that they are not being manipulated, BanklessTimes noted. Cryptocurrencies also have a large and growing community of developers and users who can help keep them secure and improve their functionality over time.

Last year, Danny de Hek was a social media guru badly in need of a social media guru. A buoyant New Zealander with geeky glasses, he dispensed advice about how to vastly expand your online audience, to a group of just 350 subscribers.

He earned a living by drop shipping electronics as he searched for ways to make serious money. Then, in February, the husband of a friend sent the 52-year-old Mr. de Hek an email crowing about a company that somehow guaranteed outsize and clockwork returns. Investors in what was then known as HyperFund — it has since been rebranded twice — could triple their money in 600 days.

“It’s the best passive income retirement plan I have ever seen,” the acquaintance wrote. Get in now then sit back and watch the cash roll in.

The message changed Mr. de Hek’s life, though not in the way his friend might have hoped. After a few days of looking into HyperFund, Mr. de Hek concluded it was a scam, one that he estimates has attracted at least $1 billion by recruiting thousands of participants, some of whom put up as little as $300 or as much as $50,000 or more.

By March, he had crafted a new online identity: crypto Ponzi scheme buster. Mr. de Hek has since denounced HyperFund in more than 130 videos posted to YouTube, some of them nearly two hours long, lecturing viewers in a style that toggles between goofball and scold.

“When I looked into HyperFund, to me it just seemed black and white,” Mr. de Hek said during one of several interviews from his home in Christchurch. “Then I thought, I need to warn people about this.”

Mr. de Hek is one of the few voices flagging crypto-based Ponzi schemes, which U.S. investigators say are a severely underpublicized scourge. The past week has shown just how volatile the market is: One of the largest cryptocurrency exchanges in the world, FTX, collapsed and the industry, is in meltdown.‌

Amid that kind of uncertainty, many investors have decided that if their tokens won’t recover from the steep drop in value that began last November, why not take a flier on a company that sounds crypto-adjacent?

“People are desperate, and out of desperation they’re giving it a go,” Mr. de Hek said. “It’s depressing because this is often a last-ditch effort.”

Mr. de Hek has denounced HyperFund in more than 130 YouTube videos from his home in New Zealand.Credit…Tatsiana Chypsanava for The New York Times

A Ponzi scheme, for those in need of a refresher, is an age-old fraud in which inflows of new money pay off earlier investors. Using cryptocurrencies does little more than lend the whole plate-spinning contraption a patina of the cutting edge — Hey, it’s on the blockchain — and makes it harder to pin down who is in charge. But the story ends the same way: champagne for those at the top, tears for everyone else.

U.S. investigators have busted a handful of crypto Ponzis over the years. Among them is OneCoin, which was based in Bulgaria and which prosecutors allege brought in roughly $4 billion from investors around the world. The charismatic co-founder of that fraud, Ruja Ignatova, disappeared after the fund closed in 2017 and is the subject of an 11-part BBC podcast, “The Missing Cryptoqueen.”

“We’ve worked multiple cases that involve more than $1 billion, and those are only the ones we hear about,” said Jarod Koopman, the acting executive director of the Cyber and Forensic Services section of the Internal Revenue Service, which spearheads crypto-Ponzi investigations, in a phone interview. “These are traditional Ponzi schemes that have been adapted to the digital landscape, recruiting investors through social media to make them look great. And they’re completely bogus.”

Mr. Koopman would not comment on cases other than those that are already public, and he declined to discuss HyperFund. The company has attracted the attention of regulators in Britain, where the Financial Conduct Authority has a webpage warning investors to “be wary of dealing with this unauthorized firm.”

Dozens of HyperFund investors have left withering takedowns on the company review site Trustpilot. One person who said he had lost $10,000 wrote, “For the love of God — stay away from this scam.” A Facebook page called “HyperVerse Scam — Now What!?” has 6,200 members.

Mr. De Hek records, edits and posts videos to YouTube in his home studio in Christchurch.Credit…Tatsiana Chypsanava for The New York Times

“So that’s my money gone,” read the top comment in mid-October. “Lesson learned.”

To Mr. de Hek, everything about the Hyper empire seems suspicious. On its website and in promotional videos, HyperFund explained that investors could buy “memberships,” starting at $300, and earn “rewards” that would accrue daily in their account. Those rewards took the form of “HU,” the internal trading currency, said to have parity with the U.S. dollar.

And why would everyone’s HU triple in 600 days? Because the putative founders of HyperFund — Ryan Xu and Sam Lee, described on promotional sites as a pair of superstar blockchain entrepreneurs — were going to pour all that cash into promising and profitable crypto projects, which they claimed would eventually serve 30 million customers. They also said the company would go public on the Hong Kong Stock Exchange.

It sounded plausible to many. Whoever ran HyperFund exploited the craze for crypto, which to most people at the time was a bafflingly complex technology that seemed to mint millionaires. But HyperFund never went public, and the only product it sold was memberships to HyperFund. Members who recruited new members got a cut of their recruits’ rewards, a perennial feature of pyramid schemes and an occasional feature of Ponzis.

To Mr. de Hek, this sale of memberships, in the absence of any product, was a blazing red flag that he had seen all too often. Before the pandemic, he had created Elite: Six, a company that hosted twice-a-week, in-person networking meetings for small-business owners in Christchurch. Those who paid $60 a month could introduce themselves and pitch their company. Mr. de Hek vetted every pitch, and in more than a few cases the main product was a joining fee, which earned the right to recruit others and get a cut of their joining fee. And so on.

“They were basically multilevel marketing companies,” Mr. de Hek said. “I hate them with a passion. I never let them in.”

To understand that passion, and his mission to wipe out crypto Ponzi schemes, you need to know something about Mr. de Hek’s childhood. Like everyone in his family, he was raised as a Jehovah’s Witness.

“From the age of 5, I was knocking on the doors of strangers, telling them that fires and earthquakes were happening for a reason, that the world was ending soon,” he recalled, describing being taught that only believers will survive the imminent destruction of earth.

He eventually started questioning some of his beliefs, and at 23, when he confessed to a romantic fling — premarital sex was forbidden — church elders “disfellowshipped” him, as excommunication is called.

Only later did Mr. de Hek conclude that he had been raised in a cult. (The church disagrees. “No, Jehovah’s Witnesses are not a cult” is an answer to a frequently asked question on its website. “Rather, we are Christians who do our best to follow the example set by Jesus Christ and to live by his teachings.”)

To Mr. de Hek, the way that HyperFund investors talked about the company, in chats and on YouTube videos, was an eerie echo of what he had experienced at a child.

A masked figure called Mr. H appears on HyperNation videos as a kind of spokesman.Credit…via YouTube

“Everyone in the Jehovah’s Witnesses loves other members, and it’s that sense of community that is the most precious thing to them,” he said. “Everyone in those HyperNation Zoom chats keeps talking about how much they love each other. And in both cases, there is no talking anyone out of their faith. For the Witnesses, it’s faith in the Bible and in end times. For HyperNation, it’s faith in the blockchain.”

Since the end of last year, the HyperFund faithful have been severely tested. In December, the company rechristened itself HyperVerse, an apparent attempt to cash in on the vogue surrounding all things metaverse. (“Open a space factory,” it says in the Galaxy Pioneer section of the HyperVerse home page.) The internal currency was changed, too; everyone’s HU was suddenly called HV.

The new packaging didn’t solve a larger problem. Last November, Bitcoin began an epic decline, from about $64,000 apiece to roughly $16,000 today. Thousands of other coins are down 95 percent or more. With a crypto winter underway, it seemed impossible for HyperFund or its successors to keep paying rewards if they were truly the fruits of crypto-related investments.

By late last year, members had started to howl online that they could not withdraw their rewards. One of them was Mike Lucas, 61, who lives in Paterson, N.J., and spent much of his working life in the shipping department of A.&P. supermarkets. He was introduced to HyperFund through a friend of a friend.

“He’d invested in it, and he said, ‘Give it a try,’” Mr. Lucas said in an interview. “He showed me this chart of how much I’d earn in 600 days if I invested $50,000. Then I looked into Ryan and Sam, and they were real people who did crypto stuff.”

Last year, Mr. Lucas put $25,000 into HyperFund, all of it from an individual retirement account. A few months ago, when he tried to make his first withdrawal, nothing budged. At first he thought it was a technical problem — the instructions are fantastically complicated. At some point, he realized that his money was gone.

“I was hoping to use it to spend more time somewhere warmer, rent a place south, maybe North Carolina,” Mr. Lucas said. “Those plans are on hold, and I’m furious. At a loss for words.”

Over the summer, as the anger mounted, HyperVerse pivoted yet again and became HyperNation. Again, the rules changed. Members could transfer their rewards to the new platform only if they bought one of several bespoke nonfungible tokens, or NFTs, such as a “purple box,” which cost $10,000. Large returns were once again promised.

In his videos, Mr. de Hek treats all of these and other twists in the Hyper plot with a light touch, one befitting a farce. That’s especially true when the topic is Mr. H, a figure who now appears on HyperNation videos as some kind of spokesman, wearing a gold mask and a black hoodie and uttering slogans — “HyperNation will be an equal, fair and transparent platform that can solve the pain points of today’s society” — in a variety of slick studio settings. It’s like getting lectured about utopia from a character in “Squid Game.”

Who is actually running HyperNation is a mystery that Mr. de Hek continues to plumb. In September, a man with a British accent named Keith Williams announced in a Zoom call of HyperNation elite — an insider sent Mr. de Hek a link to the recording — that he had been named “by corporate” as the global head of sales. He didn’t identify anyone in corporate, and Mr. de Hek has theorized that Mr. Williams is now in charge.

“Keith Williams has put his neck on the chopping block,” Mr. de Hek said in an interview. “Regulators will be looking for him.”

Mr. Williams could not be reached for comment through his LinkedIn page, Facebook account or phone numbers in online databases associated with him. He did not respond to emails sent to Future in Safe Hands, a personal coaching company where he is a director, according to Companies House, the British government’s business registrar. One recent evening, a woman at a residence that Companies House listed as Mr. Williams address, in a London suburb, said he was not home and offered to pass along a reporter’s business card.

In a recent HyperNation video, Mr. Williams described Mr. de Hek as a guy in a cheap suit looking to pay the rent through a YouTube audience.

Mr. de Hek’s suit is cheap, he says. But with a mere 2,500 subscribers, his YouTube audience remains tiny, and so far his labors on that platform have yielded a total of $1,200, after taxes, which works out to pennies per hour.

Without that drop-shipping business, he’d struggle. This doesn’t seem to bother him, in part because he is a born optimist and thinks this online scam-busting thing could one day catch on. Viewers have sent him dozens of links to likely online Ponzi schemes, and he plans to name and shame them all. If that creates enemies, fine.

“I’ve already had my life threatened,” Mr. de Hek said, with a smile. “My saving grace is that I live in New Zealand. I’m a long way from everyone.”

While addressing the Indian Banks’ Association on Monday, February 14, Reserve Bank of India (RBI) deputy governor T. Rabi Sankar said that cryptocurrencies are akin to Ponzi schemes or even worse, and banning them is the most sensible option for India.

“We have also seen that cryptocurrencies are not amenable to definition as a currency, asset or commodity; they have no underlying cash flows; they have no intrinsic value; that they are akin to Ponzi schemes, and may be even be worse,” he said in a speech.

But are cryptocurrencies really Ponzi schemes? Let’s hear from the experts

What Are Ponzi Schemes?

A Ponzi scheme is a fraudulent investing scam that promises high rates of return with little risk to investors. The term owes its origin to a swindler named Charles Ponzi, who made his name in 1920. However, the first recorded examples of this sort of investment scam can be traced back to the mid-to-late 1800s to Adele Spitzeder in Germany and Sarah Howe in the US.

A Ponzi scheme is an investment fraud in which clients are promised a large profit at little to no risk. Companies that engage in a Ponzi scheme focus all of their energy into attracting new clients to make investments. These are generally multi-level marketing schemes, in which money from new investors is used to pay ‘profits’ to earlier investors. This continues till new investors keep joining.

Multi-level marketing itself is not illegal in India because there is a product being sold. But direct marketing companies cannot promote pyramid or money circulation schemes.

A Trading Terminal

Some experts agree that there are cryptocurrencies that work like Ponzi schemes. “When it comes to crypto products, there are many products with projects that are trying to work like Ponzi schemes. It’s spread across the world but is much more popular in countries such as Malaysia and Indonesia. Crypto is used as a way of payment because it’s easier and, by using crypto, they can open the entire Ponzi scheme to the whole world instead of being restricted to a specific country or region,” says Sathvik Vishwanath, co-founder and CEO, Unocoin, a crypto exchange.

Cryptocurrencies are, in fact, worse than Ponzi schemes, says Gaurav Mehta, founder of Catax, an online crypto tax and auditing platform. “It is a more complicated asset than a Ponzi scheme, and it is worse since it not only encourages evangelism but also undermines nation states by interfering in the currency system. When the tulip mania passed, people were at least left with tulips to smell; when Bitcoin passes, they (investors) would be left with nothing,” he said.

Other don’t agree. A Ponzi scheme promises high returns with minimal risk, whereas crypto trading is quite volatile due to market conditions, regulator challenges, and other factors, which gives investors an opportunity to earn high returns but while they face high risk.

“Clubbing crypto assets with Ponzi schemes is grossly unfair. Multi-level marketing schemes and chit fund schemes that promise steep returns would qualify as Ponzi schemes,” says Sharat Chandra, vice-president, research and strategy, EarthID, a global decentralized self-sovereign identity management platform.

As cryptocurrencies fight for legitimacy, bad players make the task more difficult, especially as the commentary around cryptocurrencies has moved beyond payments (legal tender) use cases to aspects such as asset tokenisation, metaverse, gaming and web3.0.

Conclusion

While cryptocurrency is technicaly not a Ponzi Scheme, the effects of malicious trading schemes are having the same effects as if it were a Ponzi Scheme, so does it really matter? Are we just splitting hairs? I know one thing if I am going to invest in something, I want something tangible that I can see and feel and wrap my mind around. Maybe that is old school, but sometimes new is not always the best. There is an old saying that “a fool is soon parted from his money.” So is it foolish to invest in bitcoin? Several investors in FTX will say it was. Only time will tell if this is a valid investment patform. Right now with its poor track record, I would rather put my money under my mattress.

Resources

cpapracticeadvisor.com, “One-Third of Americans Believe Cryptocurrencies Are Ponzi Schemes, Survey Says.”; nytimes.com, “The Crypto Ponzi Scheme Avenger.”; fool.com, “Is Bitcoin a Ponzi Scheme?” by Emma Newbery; outlookindia.com, “Are Cryptocurrencies Really Like Ponzi Schemes? Here’s What Experts Have To Say.” By Harsh Kumar;

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