Scam, cryptocurrencies, pyramids. How to recognize them and how to avoid them.

Scam, cryptocurrencies, pyramids. Blockchain technology and cryptocurrencies are still gaining popularity. More and more ordinary people are becoming interested in this industry. Most often because of the potentially fast profit – forgetting about the risk involved. New investors often underestimate their lack of experience in crypto-investment, thus becoming a “treat” for many types of fraudsters who are just waiting to “put their hands” on their savings. And this despite the fact that it is quite a common phenomenon. There are, however, many ways to remedy this. In this publication we will focus on various types of scams (scams, pyramids) related to thecryptocurrencies world: how to recognize such a phenomenon and what to do to avoid losing your capital. Dear reader, if you are a new investor or have experience in crypto markets, but you have doubts about some investments and want to raise your awareness in this area, this is the perfect article for you.

What is the Scam and the Financial Pyramid?

Scam, it is a kind of fraud that consists in creating trust, e.g. by creating a false image and then using it to extort money or other part of property. Fraudsters try to show society at all costs how lofty and carefree they live their lives. In reality, however, this is not the case. The aim is to attract as many unconscious investors as possible to the venture offered by the swindlers. They often succeed because wealthy status is very attractive to society. Fraudsters try to inspire trust by acting on human emotions – both positive – are suspiciously nice (altruism, empathy) – and negative – by arousing a desire for large profits (greed, pride). Scam can take various forms, for example, directly gain trust by sending e-mails or through personal contacts, as well as more complex actions, through websites and blogs. One should always ask oneself whether a person who has found a way to become a millionaire would like to share such knowledge with us, instead of quietly making their own profits.

Scam, cryptocurrencies, pyramids.

Internet fraud is nothing new. The majority of society has managed to resist the classic forms of money scams that were supposed to be targeted at “Nigerian businessmen”. In the age of the Internet, old ways of deceiving the society are becoming less and less effective. The example of “granddaughter methods” can be quoted here – criminals often use this way of acting, perhaps because of its simplicity. They look for their potential victims in the phone book, usually choosing names that may indicate the age of the person. They then call, impersonating their granddaughter, asking for financial help – for example, to pay off a debt. If they succeed in persuading the victim to give financial help, they say that they are unfortunately unable to collect it personally. For this purpose, they send the appropriate person for money and ask for discretion.

The victims of such precedents share their experiences with the rest of society, which prevents fraudsters from acting on a larger scale. Tactics of people who want to deceive us are also evolving – unfortunately, the world of cryptocurrencies gave them a completely new “arsenal” of ideas for scamming funds.

The nature of cryptographic transactions, despite the fact that in its idea was created for honest citizens, works perfectly in the hands of dishonest people. Irreversibility of transactions guarantees that victims are not able to recover lost money. Pseudo-anonymity in many cases significantly reduces the risk of legal consequences, making the hypocrite more direct in its intentions.

The Ponzi scheme

One of the popular forms of this phenomenon is the “Ponzi” scheme. It is the so-called “financial pyramid”. The entire mechanism depends on gaining by the founder the largest possible number of participants, who encouraged by promised – in many cases huge – profits put money in there. The profit of a given interested party is paid out from the contributions of new participants. The company can promise the members of the structure that it invests in various services or material goods. However, this does not mean that this is the case. It is usually a disguise of actual activity. The organizers encourage the participants of the whole project to recruit new people. For this reason, the whole concept is doomed to fail in advance, because the system requires a constant flow of capital, and in reality this possibility is significantly limited. So the structure of the pyramid exists as long as the amount of withdrawn funds by the users is small in relation to the inflow of capital.

The largest pyramid that has ever existed was created by the US-based entrepreneur Bernard Madoff. He gained as his clients, among others, banks: HSBC, Fortis, BNP Paribas, JP Morgan and Bank of America. Companies and institutions such as Columbia University or the Eli Wiesel Foundation. The undertaking was elite, with many well-known faces from the world of business, politics and culture belonging to it.

It was only possible to join the project on the recommendation of another participant. The minimum amount of investment was 10 million dollars. The project was to invest mainly in real estate and securities, but the company’s liquidator said that for the last 13 years the fund had not invested at all the entrusted funds. When the money had to be withdrawn, the founder paid with money deposited by new people. Through this pyramid, investors and banks lost a total of about 65 billion dollars.

How can you protect yourself against fraud?

First of all, you should always be reasonable. There is also the iron rule that if an offer seems too attractive to be true, it probably is. Many suspicious investments promise huge profits.

It is always worth remembering that if someone offers us an above-average interest rate, we should be very doubtful about the whole thing. The situation on the crypto market shows that there are exceptions to this rule. It was possible to achieve such a return on investment by investing capital in appropriate crypto-currency, for example, in 2017. People who chose this form of investing money were exposed to the risk of losing some or all of their own capital.

You can never trust offers that “guarantee” the multiplication of our funds with zero investment risk. In such a situation, the “red light” should come on, because such possibilities simply do not exist. Don’t make a decision about investing your own capital under the influence of emotions. Rationally assess each point of the project. If the whole concept is presented by a “energetic leader” who is supposed to make you a wealthy person, you better be careful. Any form of marketing that aims to manipulate emotions by inducing a certain type of behaviour is usually aimed at diverting the attention of a potential investor from the actual operation of the enterprise. If the presenter avoids answering questions about the facts related to this investment and tries at all costs to persuade us to participate in this project, it is worth considering whether to go further. Looking for a quick enrichment can usually end in a “defeat”. While making this type of decisions you should not hurry and worry that you missed the opportunity. It is better to lose an opportunity than capital. Before investing in anything, an appropriate “research” and a summary of the pros and cons of a given concept should be carried out in order to eliminate unnecessary risk.

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