Beware of Financial Traps: How to Identify and Avoid Ponzi Schemes

When you hear an investment promise of “stable monthly returns of 30%” or “zero risk high returns,” your warning bells should ring immediately. Behind these seemingly attractive promises often lies a timeless financial scam—a Ponzi scheme. It appears in various glamorous disguises in the stock market, the crypto world, and even in your own financial products, draining the hard-earned savings of countless individuals.

What is a Ponzi Scheme? A Scam Model Repeated Countless Times

Essentially, a Ponzi scheme uses new investors’ funds to pay returns to earlier investors. It sounds simple, but in practice, it is highly deceptive.

Scammers will depict a shiny investment project, promising extremely high returns. But these profits do not come from real business operations; instead, they are sustained by continuously attracting new investors to maintain this “huge lie.” As long as new funds keep flowing in, early investors can receive substantial returns, attracting more people to join. But once the influx of new funds cannot cover the payouts, the entire system collapses, and later investors lose everything.

How did this scam get its name?

The name of this scam originates from an Italian immigrant Charles Ponzi. In 1903, Ponzi illegally entered the United States, tried various jobs without success, and was even imprisoned in Canada for forgery and in the US for human trafficking. But during his time in prison, he realized a “truth”—financial frauds make money faster than any legitimate job.

In 1919, just after World War I, the global economy was in chaos. Ponzi seized the opportunity, claiming he had discovered a money-making secret: buying European postal reply coupons and reselling them in the US for profit. He designed a seemingly complex, but actually flawed, investment plan to sell to the public. In about a year, around 40,000 Boston residents fell into this trap, most of whom were ordinary poor people lacking financial knowledge.

Although the Financial Times pointed out that it was a scam at the time, Ponzi used a more enticing bait to crush all doubts—he claimed investors could get 50% returns in 45 days. When the first batch of investors actually received their money, subsequent investors flooded in. It wasn’t until August 1920 that the money chain broke down, and Ponzi was sentenced to five years in prison. From then on, this type of scam was permanently named “Ponzi scheme.”

Typical Cases of Modern Ponzi Schemes

Madoff scandal: the biggest 20-year lie in the financial world

If Ponzi pioneered this “dark art,” then Bernard L. Madoff took it to the extreme. This financial tycoon, a former NASDAQ chairman, successfully defrauded $17.5 billion through a carefully constructed trust network.

Madoff’s brilliance lay in his deep understanding of human nature. He infiltrated high-end Jewish clubs, used social networks, and through introductions among friends and acquaintances, created a strong sense of trust—after all, if recommended by friends, it must not be a scam. He promised clients a steady 10% annual return and boasted that he could profit easily in both bull and bear markets.

In reality, these seemingly stable returns came from fictitious trades. It all unraveled in 2008 during the global financial crisis when investors demanded large withdrawals—about $7 billion in redemption requests—this 20-year scam finally collapsed. Madoff was sentenced to 150 years in prison, with total fraud amounting to $64.8 billion.

PlusToken Wallet: a blockchain disguise of a scam

With the advent of the crypto era, Ponzi schemes found a new disguise—blockchain.

PlusToken Wallet is a typical example. This app, claiming to use “blockchain technology,” was active in China and Southeast Asia, promising users monthly investment returns of 6%-18%, claiming these profits came from crypto arbitrage trading.

In fact, it was an old scam wrapped in high-tech concepts. Many investors with limited understanding of blockchain were attracted, contributing about $2 billion. According to a report by blockchain analysis firm Chainalysis, $185 million had already been sold. In June 2019, when the wallet could no longer process withdrawals and customer service disappeared, victims realized— their money was gone for good.

How to Avoid Becoming a Victim? 10 Prevention Tips

1. Be instinctively skeptical of “low risk, high return”

There is a fundamental rule in investing: risk and return are proportional. Any promise that defies this rule should raise suspicion. If an investment claims a fixed monthly return of 30% or daily profit of 1%, 99.9% is a scam. Even an annualized return of 20% in legitimate investments is considered high.

2. Beware of “zero risk” lies

Madoff attracted many high-net-worth individuals with promises of “guaranteed investment success and no losses.” But in reality, no investment is immune to economic fluctuations; it’s impossible to guarantee 100% continuous profit, let alone fixed returns.

3. Demand a thorough understanding of the investment logic

Scammers like to use complex and obscure terminology to create a sense of mystery. They will package investment strategies in an extremely complicated way, making it hard for you to understand. Genuine investment products and strategies should be explainable even to ordinary people. If the explanation becomes more confusing the more details you ask for, it’s a dangerous sign.

4. Request the project team to provide specific information

When you inquire about details, if the responses are vague, evasive, or full of excuses, what does that indicate? The other party is guilty. Legitimate projects answer questions openly.

5. Use business registration systems for background checks

Before investing, check the project company’s registration information, registered capital, and operational status on official business websites. If the project is unregistered or information is vague, it’s a red flag.

6. Be alert to withdrawal difficulties

This is a hallmark of Ponzi schemes. If it suddenly becomes difficult to withdraw funds, with delays, exorbitant fees, or arbitrary rule changes, withdraw immediately.

7. Recognize “pyramid” recruitment models

Many scams encourage investors to recruit friends and promise commissions. This “downline” model is essentially pyramid selling. If most of the returns come from recruiting rather than real business, it’s a trap.

8. Consult professionals

If unsure, seek advice from a professional financial advisor or investment consulting firm. Spending a little to hear expert opinions is far better than losing everything.

9. Research the project background and founders thoroughly

Before investing, do your homework. Check the background and past experience of the project initiators, and whether they have any violations. Be wary of those who portray themselves as “geniuses,” “heroes,” or “prophets.”

10. Control human greed

This is the most critical point. The reason Ponzi schemes succeed repeatedly is that they exploit the human desire to get rich overnight. Remind yourself: there are no free lunches; steady returns are true returns. Stay alert, curb greed, and stick to your principles—this is the ultimate defense against scams.

Conclusion

From Ponzi to Madoff to PlusToken, Ponzi schemes appear in various new forms, but their core logic remains unchanged—using new money to sustain old promises, profiting from greed, and fleeing overnight when they collapse.

Remember, the essence of investing is matching risk with return. Any promise of “stable high returns with zero risk” is essentially using your money to pay early investors. Once new funds dry up, you become the last bagholder. Stay vigilant, be rational—this is the ultimate safeguard to stay away from these traps.