The Biggest Ponzi Schemes in the History of Crypto

The early cryptocurrency investors must remember the times when their relatives and friends were literally calling them halfwits, or worse, for devoting money to a newly emerged asset class that was perceived by most as one big Ponzi scheme. Surely, the majority of those non-believers had to eat up these words after Bitcoin (BTC), and other major coins, enjoyed the exponential growth of their value, but there is no denying the fact that the crypto industry saw a number of frauds on its way to major adoption, especially during the so-called initial coin offering (ICO) boom.

Buy/Sell Bitcoin

These schemes had taken place mostly in the period between 2016 and 2018, mainly due to the unregulated nature of the rapidly growing industry, when investors were flocking to numerous blockchain - and pseudo blockchain - startups in hopes of making a lot of money quickly, instigated by sheer greed, the main driving force for all financial machinations.

Those investors that were cautious enough to do the research before stacking on altcoins might have reaped significant profits, but those who got caught up in aggressive marketing campaigns that promised immense profits in a short time were swindled out of their money.

A lot has changed in the cryptocurrency industry since that time: the ICO bubble had burst and made this method of coin distribution obsolete, the crypto regulations got stricter, while investors became savvier and more precautions when choosing where to put their money.

However, it doesn’t mean that crypto is now totally scam-free, the fraudulent activity has just taken other forms and shapes, but the danger of being defrauded remains high, especially for those who aren’t willing to commit themselves to studying all ins and outs of this industry and the underlying technology.

According to the recent report from the Federal Trade Commission (FTC), there has been a nearly 1000% growth in the number of scams across the cryptocurrency sector since the tail end of 2019. Over this time, the agency received more than 7,000 reports of illicit activities associated with digital currencies. The victims of those schemes lost on average $1,900. 

In this article, we will remember the biggest pyramid schemes in the history of this fledgling sector of global finance that left gullible investors with holes in their pockets. Hopefully, these stories will come as a warning to those who are ready to jump on every opportunity that promises that ephemeral “ticket to the Moon” instead of devoting themselves to the art of cryptocurrency trading and investment. Remember, it’s always better to learn from somebody else’s mistakes instead of your own because here, a misjudgment instigated by greed could cost you thousands of dollars or even your life savings.

How to spot and avoid cryptocurrency scams

But before getting down to reviewing the biggest scams in the history of crypto, allow us to give you a few expert tips on how to tell the difference between a viable blockchain project with the coin or token that could generate a substantial return on investment over time, and a blatant fraud that has the only purpose of sucking out the money in a get-rich-quick scheme.

When it comes to separating the wheat from the chaff, it’s important to remember that absolutely no one, not even in the traditional markets of stocks, bonds, and commodities, can provide guaranteed returns on the investment. Therefore, if you ever come across the website of a new crypto startup that offers “guaranteed profits” or something with similar wording, you should leave it immediately and put a big red flag on its domain name. And if this “guaranteed ROI” is in triple digits, like 100% or more, you wouldn’t have to be Sherlock to know that it’s a shake-out scheme. Sure, we have seen dozens of cryptocurrencies going up over 1000% in value in a relatively short time, but those rallies had nothing to do with frauds but rather the general rules of supply and demand, while blockchain projects behind those coins have a fully operational network, a substantial social media following, and a comprehensive whitepaper that reveals in detail the goals, the technological edge, and the tokenomics behind the coin.

But while sensible investors have learned not to buy into the promises of guaranteed huge profits, the scammers are coming up with new and more sophisticated ways to lure the money out of people’s wallets. The new approaches include the creation of platforms that offer cryptocurrency trading and investment tips, where the users get redirected to shady websites.

Another trick that scammers use these days involves setting up the so-called giveaways where users are asked to send a certain sum in crypto (usually Bitcoin) to a designated address and receive back two or even three-fold more coins. The recent example of such a scam saw a German crypto enthusiast named Sebastian sending over $400,000 worth of BTC after receiving a notification from the fake Elon Musk Twitter account that read, “Dojo 4 Doge.” The imposter had also sent a link to a “special giveaway” that took Sebastian to a professionally designed website with a countdown timer and a semblance of increased activity from other participants.

Everything seemed so real that the man didn’t hesitate to send as many as 10 BTC to the “Tesla team.” When the timer wound down, the man, naturally, did see any BTC arrive back in his wallet and realized that he had been scammed out of an enormous sum of money.    

It’s typical for crypto scammers nowadays to pose as celebrities shilling for a certain coin: Elon Musk, Bill Gates, Paris Hilton, Kanye West, and a number of elite athletes, all of them have indirectly featured in various fraudulent schemes that resulted in the theft of millions of dollars during the past two years alone. Keep that in mind when you see another crypto advertisement that offers “free money.” Remember, there is no such thing as free money - financial wellbeing is achieved only through knowledge, caution, and patience.   

Who’s Mr. Ponzi?

“Ponzi scheme” is the most widely used term when describing a financial scam of a grand scale, regardless of whether it occurs in the crypto sector, traditional finance, or even the jewelry industry. Let’s take a quick journey to the history of financial machinations and find out who was that person who got the “honor” of having his name become a generic term for financial skullduggery. 

Charles Ponzi was the legendary scammer and con artist who was born in Italy in 1882 and later immigrated to the United States in search of greener pastures. The story has it that he arrived in the U.S. with only $2.5 in his pocket, which he then turned into millions in defrauded money. After a brief and unsuccessful stint in the US, Ponzi moved to Canada, where he got the job as an assistant teller at Banco Zarossi that mostly served the Italian immigrant that resided in Montreal. Even before the arrival of Ponzi, the bank has been involved in shady operations, like providing a 6% interest on bank deposits, which was twice as high as the rate offered at other banks. It was there where the fledgling con artist discovered the scheme called “robbing Peter to pay Paul,” which became the framework of his grand machination that involved the arbitrage deals with international reply coupons (IRC). In essence, Charles Ponzi convinced investors that he would be able to profit from buying IRC in Europe at a substantial discount with the purpose of selling those coupons in the U.S. at face value. Given that the national currencies of European states fluctuated greatly at that time, the scheme sounded very plausible. The investors were lured in by the promise of a 50% profit in just 45 days and a 100% return in 90 days. Sounds familiar, isn’t it?

To raise the credibility of his operation, Ponzi had secured the promised returns to early investors, which had set off the rumor mill and attracted flocks of greed-struck people. As a result, those who had fallen for that scheme lost around $20 million, as they had to sell their IRC for 30 cents to the dollar when the scam was revealed, while five banks that were associated with this crime had collapsed. Charles Ponzi himself served a number of years in prison and died in 1949 in Brazil, with only $75 to his name.

In fact, Charles Ponzi was not the first one to carry out such a machination. In 1879, a woman named Sarah Howe established the “Ladies’ Deposit Company” to allegedly help young unmarried women to achieve financial wellbeing on their own accord. Howe promised a guaranteed 2% on every deposit per week, an interest rate which was, again, much higher than that offered by legitimate banks. In reality, the fraudster used money coming from new deposits to cover the interest on older ones, thus “robbing Jane to pay Jill.” After the swindle had been uncovered, Howe was sentenced to three years in prison, a very mild punishment for such an immoral deed.

The history then saw the emergence of numerous Ponzi schemes, perpetrated by Lou Pearlman, Reed Slatkin, Scott Rothstein, Tom Peters, and the most notorious of them all, the Bernie Madoff one, which ran for more than a decade and resulted in hundreds of investors being defrauded for over $20 billion.   

The most notorious ICO scams

The mentioned ICOs became the latest example of major scams that were aggravated by the absolute novelty of the blockchain technology, meaning that not a lot of people were capable of figuring out what this piece of tech actually did; they were simply blinded by the enormous rise of the crypto market and only had dollar signs flashing before their eyes. Besides, there had been no clear classification for the newly emerged asset; therefore, the regulators had their hands tied when it came to settling disputes that involved crypto, while the scammers had an open playground to try out their maleficent strategies. The anonymity of cryptocurrency transactions had also played into their hands, making it virtually impossible to track down the receiving cryptocurrency wallet and take legal action against the criminals.

Eventually, the ICO craze had died down, mainly due to the decrease of interest towards cryptocurrencies during the infamous Crypto Winter of 2018-2020. And even though these schemes existed only for a relatively short period of time, their organizers had beguiled the honest John’s of this world out of over $700 million, according to the most modest calculations.

Let’s have a quick recap of the largest ICO scams because even though these schemes have lost their relevance, they do share a lot of similarities with the scams of today.

To this day, Pincoin remains the biggest ICO fraud, which saw its founders perform an exit scam with over $660 billion of investors’ money. It is believed that over 32,000 people had fallen for promises of a guaranteed profit of 48% per month and the additional 8% referral fee if they were to drag their friends into the scam, a typical practice in multi-level marketing. The profits were paid in iFan tokens that became worthless after the founder had vanished into thin air.  

Next up is PlexCoin, a crypto Ponzi scheme that took away more than $15 million from gullible investors back in 2017, when the ICO bubble began to inflate to enormous proportions. The project had been promoting what seemed like a legitimate blockchain ecosystem with a proprietary digital wallet, physical debit card, and even a virtual Plexa bank. But that wasn’t the real point of attraction - the team guaranteed the ROI of as much as 1300% in the first couple of weeks from the day of investment. The scheme had drawn the attention of the Securities and Exchange Commission (SEC) that pressed charges against its founders Dominic Lacroix and Sabrina Paradis-Royer and froze their accounts, though, by that time, the lion’s share of defrauded funds had already been transferred elsewhere.     

Benebit is the next on our list of biggest ICO scams in the history of crypto. The financial damage caused by this scam amounted to $4 million. Unlike the PlexCoin project, which had an amateurish-looking website and poor activity on social media, Benebit had all the characteristics of a genuine blockchain project: a decent website, a well-composed whitepaper, and even a social media channel that boasted more than 9,000 members. The founders presented this “blockchain project” as the unifying system for customer loyalty points and programs. However, the attentive onlookers noticed that the founders were using fake identities and provided false personal information. After the suspicions were made public, the scammers took down the website and social media outlets and rode off into the sunset.   

Lastly, we have Bitconnect, a scam that was comparatively “harmless” as the investors lost “only” $700,000 to the con artists, but we all remember it thanks to YouTube clips with the overzealous promoter who was screaming, “Bitconneeect” at the top of his lungs during one of the team rallies. That man became a popular Internet meme that serves as a reminder that the things that are being marketed so intensely usually have little to no substance. The funny thing is that Bitconnect was among the first who introduced the concept of cryptocurrency lending, though it had been clear that the promised interest payments were far from being even remotely realistic - more than 1% daily compound payments. At a certain point, Bitconnect was among the top 20 cryptocurrencies by market capitalization as the price of its token had skyrocketed from around $0.2 (the ICO price) to the all-time high at almost $500. However, when this Ponzi scheme had been brought to light, the price of the said coin had plummeted back below $1 and subsequently all the way to $0, rendering all investments in this coin void.

The really monstrous scams that left the mark in the history of crypto

And now, we have arrived at the point where we will reveal the biggest and the worst frauds in the entire history of digital currencies. Compared to them, the ICO scams will seem like child’s play because these people forced millions of people to part with billions of dollars.

OneCoin

By far the biggest financial pyramid in the history of crypto, which accumulated nearly $15 billion, was established in 2015 by Ruja Ignatova, a 36-year old entrepreneur from Bulgaria, who was also a self-proclaimed doctor of philosophy. During her numerous promotional campaigns, she had been actively persuading people that OneCoin is way better than Bitcoin, claiming that in a couple of years, BTC would have been forgotten while OneCoin was destined to dominate the market.

Apparently, Ignatova acted as a smart socialite with connections in the highest offices, so a lot of people had actually fallen for that nonsense purely because of her status and image. In reality, OneCoin didn’t even have a hint at blockchain technology behind it, and all coins were minted by the company One Coin Limited. The reason behind the overwhelming success of that scam lies in the fact that it was popularized three years before the bull market of 2017, which means that only a handful of people heard of blockchain then.

To most, it was all just a get-rich-quick scheme, which had eventually fired back in their faces. However, the organization had camouflaged this scheme as an educational course in cryptocurrency trading where OneCoin was used as a tool to teach people how to trade; therefore, it didn’t carry any legal responsibility. OneCoin hadn’t been listed on any cryptocurrency exchange - all trading operations were conducted on a proprietary platform where these coins weren’t allowed to be exchanged for crypto or withdrawn to other wallets.

There had been reportedly 3 million people who believed in this scheme and invested anywhere from $4 billion to $15 billion in it. Ignatova had disappeared in 2017 after numerous respectable financial magazines had labeled OneCoin as an outright Ponzi scheme - to this day, her whereabouts remain unknown. After Ignatova had fallen off the radar, the OneCoin network had been run by her brother Konstantin Ignatov. He remained in this role until 2019, when the FBI arrested the man on multiple charges of fraud. Konstantin now faces 90 years of prison time.    

PlusToken

PlusToken was another infamous cryptocurrency scam that operated across Asia and Eastern Europe, though a large portion of defrauded investors came from Canada and the U.S. The scammers offered the guaranteed ROI of 10% - 30% on all PLUS tokens, which were at that time listed on two major cryptocurrency exchanges, namely Huobi and Bithumb. In order to get the promised perks, the investors had to purchase PLUS tokens on the said platforms. At that time, the market capitalization of PLUS was at $2.9 billion, while the coin was traded at $2 at the peak.

The scheme was organized so professionally that it managed to attract as many as 200 thousand BTC, which is roughly 1% of its entire supply, along with around 800 ETH and $26 million worth of EOS. Consequently, the value of this token was reduced to naught while the organizers went into hiding.

However, in 2019, Chinese police managed to track down and arrest a few individuals from the PlusToken team in the Republic of Vanuatu, though the mastermind behind this scam, who goes by the nickname “Leo” still roams free. In 2020, Chinese authorities boasted that they arrested another 82 senior members of that scam and retrieved a certain part of defrauded funds. That same year, the court sentenced the scammers to eleven years of jail time.

Mirror Trading International

In one of its recent reports, Chananlysis called Mirror Trading International (MTI) the biggest cryptocurrency criminal act of 2020 and one of the biggest exit scams in history. The scheme originated in South Africa as a cryptocurrency exchange that featured a very obtrusive, yet well-organized, multi-level marketing structure. At first, the platform offered the services of automated trading on Forex but then expanded its scope to derivatives and cryptocurrencies.

The main selling point of this scammy platform came in the face of a “sophisticated” AI-based trading bot that was supposed to generate a daily profit of 0.5% - 1.5% in BTC, which should have amounted to a 500% annual ROI. Many people pointed out that the expected profits are way too high even for a volatile cryptocurrency market that regularly has considerable drawdowns, but these warnings fell on deaf ears.

The Mirror Trading International was taken down at the end of 2020 when its CEO, Johann Steynberg, fled to Brazil with investors’ money - approximately 23 thousand Bitcoin. It was estimated that MIT had accumulated nearly $600 million from 471 thousand registered accounts before it collapsed. On July 6, the Financial Sector Conduct Authority (FSCA) imposed a $7 million fine on chief executives at MTI, days after a South African court had carried out a final liquidation order.

Todex

The latest major cryptocurrency scam took place in 2021 in Turkey and also involved a now-defunct cryptocurrency exchange called Todex that was founded a couple of years before by the 27-year old entrepreneur named Faruk Fatih Ozer. On April 21, customers who traded on that platform received a suspicious notification that read that the exchange was to halt all operations to deal with irregular fluctuations on the market. The maintenance was supposed to last for five days but never renewed its operations, while the founder has gone missing.

According to numerous journalist investigations, Ozer has deleted all social media accounts and fled to Albania with over $2 billion of customers’ money. Later, the fraudster published a press release in which he claimed that only 30 thousand of 390 thousand users, who were allegedly defrauded, had experienced problems trading on Todex, while the accusations of theft were “based on false pretense.” The Turkish authorities had issued an international order for the arrest of Ozer and later caught 62 persons that were involved in the scam - 16 criminals still remain on the wanted list. Among those arrested were the siblings of the shady CEO, Guven Ozer and Serap Ozer, who had significant holdings in crypto on other Turkish exchanges, BtcTurk and Paribu - they remain in custody awaiting trial. 

Perhaps the Todex scheme was one of the reasons why the Turkish authorities had imposed a strict ban on all operations with cryptocurrencies to safeguard other investors from potential losses.

This comes to show how scams are hampering the adoption of cryptocurrencies and create a bad rap for this revolutionary financial vehicle. Despite the fact that crypto has had a significant progress in its adoption, many people remain unaware of all intricacies of this technology and fall prey to the industrious scammers. And even though crypto will always hold the promise of great profits, remember that scams are still flourishing, so you can never be too cautious, especially when someone promises you a trip to the Moon.

Author: Alex Paulson for Crypto-Rating.com