What is a Ponzi Scheme?

A Ponzi scheme is a deception in which people are enticed into investing money in exchange for the promise of unusually high returns within a short period of time, with earlier investors being paid off from the cash extracted from later investors. The person operating the scheme puts all of his efforts into attracting new investors, since new ones are needed to maintain an increasing inflow of cash. One action taken to attract the more skeptical investors is to pay out promised returns to early investors, which spreads the word that the operation is legitimate. In fact, their initial good fortune in being paid the advertised returns may lead early investors to re-invest in the scheme, along with their friends and family.

The deception eventually collapses when the stream of incoming cash flows declines below the amount of outgoing cash flows. The person originating the deception typically disappears with all remaining cash shortly before the scheme would have collapsed anyways. The scheme is named after Charles Ponzi, who operated such a deception in the 1919-1920 time period, bilking more than $15 million out of investors.

Example of a Ponzi Scheme

A recent example of a Ponzi scheme is the case of Johann Steynberg and Mirror Trading International (MTI), which was exposed in 2020 and became one of the largest cryptocurrency-related Ponzi schemes to date. MTI, a South African-based company, claimed to offer high returns through an automated trading program using Bitcoin as its primary investment vehicle. The company, under Steynberg’s leadership, promised investors daily returns of up to 10% through a sophisticated trading bot that allegedly used artificial intelligence to trade foreign exchange markets. These promises attracted more than 29,000 BTC, worth over $1.7 billion at the time, from hundreds of thousands of investors worldwide.

However, investigations by financial authorities, including the U.S. Commodity Futures Trading Commission (CFTC), revealed that there was no real trading activity taking place. Instead of generating profits through legitimate trading, MTI operated as a classic Ponzi scheme—using new investors’ Bitcoin deposits to pay returns to earlier participants. Once the scheme collapsed in late 2020, Steynberg disappeared, sparking an international manhunt. He was later arrested in Brazil in 2021 on fraud charges.

In 2022, the CFTC charged Steynberg and MTI with fraud, and in 2023, a U.S. court ordered Steynberg to pay over $3.4 billion in restitution and penalties—the largest fraud case involving Bitcoin ever handled by the agency. This case highlights the growing risks associated with unregulated cryptocurrency platforms and emphasizes the importance of due diligence before investing in high-return schemes.

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Indicators of a Ponzi Scheme

A Ponzi scheme may be in operation when one or more of the following indicators are present:

Guaranteed high returns with little or no risk. Ponzi schemes often promise consistently high returns regardless of market conditions, which is highly unrealistic in legitimate investments. If something sounds too good to be true, especially with no risk involved, it likely is.
Unregistered investments. Fraudulent schemes typically offer investments that are not registered with regulatory authorities like the SEC. Lack of registration means there's little oversight, making it easier for fraud to go undetected.
Secretive or complex strategies. Scammers often avoid providing clear explanations about how the investment generates returns. If you can’t understand how the money is being made, that’s a major red flag.
Difficulty withdrawing funds. In Ponzi schemes, investors often face delays or excuses when trying to cash out. This is because the scam relies on continuous new investments to pay existing investors.
Overemphasis on recruiting new investors. Ponzi schemes often encourage participants to recruit others to keep money flowing in. If the focus is more on growing the investor base than on the actual investment, it’s likely a scam.
Lack of independent verification. There is usually no third-party custodian, auditor, or verification of the investment’s performance. The scheme depends on participants trusting only the organizer’s statements, not actual documentation.