Cryptocurrencies have huge potential for innovation and are still in their infancy as a new asset class.Not everyone understands it, and not everyone accepts it.And like any new
technology, cryptocurrencies are surrounded by various myths and false claims.Among them, cryptocurrencies, like other high-risk assets, are sometimes called Ponzi schemes.
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It is true that in the crypto-currency industry, as in the traditional financial sector, a fraudulent project appears from time to time.
However, such cases are always isolated exceptions that do not characterize the industry as a whole.However, they always cause a loud resonance in society and ensure long-term negative publicity, creating fertile ground for myths and prejudices.
What exactly is a Ponzi scheme?
A Ponzi scheme refers to a financial scam that allows initial investors to earn income by attracting funds from more and more new investors.The new members of the scheme provide a high “yield” to the old members, giving the false impression that the project is a success story.The scheme can work as long as new members join it.
Usually, the project itself does not create any additional value for the investors and there is a simple redistribution of funds among the participants of the scheme.
This model is very similar to various pyramid schemes, however, Ponzi schemes do not require investors to recruit new members.
The initial participants in the Ponzi scheme may indeed make large profits, but when the flow of new deposits stops, the scheme collapses and most participants lose their investments.
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The cradle of the Ponzi scheme is the traditional financial sector
The scheme itself is named after the fraudster Charles Ponzi, who created this type of scheme in the
USA in the 1920s.
Most of the most famous Ponzi schemes come from the traditional
world of finance.
Billion-dollar schemes run by such famous figures as Bernie Madoff, Robert Allen Stanford, Tom Peters and many others were hidden under the banner of reputable investment funds or brokerages.
Of course, there have also been some examples of Ponzi schemes in the crypto-
technology industry, such as “OneCoin” or “Bitconnect”.However, just as we don’t call all investment funds Ponzi schemes, individual scams in the new crypto industry do not characterize the industry as a whole.
Digital
economy and new technologies
Cryptocurrencies are based on new blockchain technologies aimed at the development of the digital
economy.
Crypto technologies do not contain any elements that would make this asset class more open to Ponzi schemes.These are individuals who take advantage of the financial industry and technology for criminal purposes to defraud uninformed investors.
Similar to other asset classes, cryptocurrency requires due diligence on each project before investing.Financial investment decisions must be well-thought-out and not made on the spur of the moment.Being careless when it comes to managing your finances is a fast track to a trap set by fraudsters.
High risk – both high profits and high losses
High-risk investments are sometimes mischaracterized as Ponzi schemes.
Higher risk usually also means higher profit potential.But it works both ways – higher risk also means higher potential for loss.By investing in the same high-risk assets, some investors can make fantastic profits, while others can lose a large part of their savings.
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It should be noted that, in general, the majority of newly created companies go bankrupt, including good and promising projects.
The reason can be both bad management and wrong strategic decisions, bad
business practices or the choice of inappropriate technologies, etc.
Therefore, automatically attaching a Ponzi tag to any high-risk asset or investment is not justified.It should be taken into account all the more when talking about new
technology projects, where there is a lot of unknown and yet to be discovered.
Cryptocurrencies are affected by market fluctuations in a similar way to other assets
In terms of potential risks, cryptocurrencies are compared to
technology companies and oil stocks.The exception is stablecoins, which have a significantly lower risk profile.Also, in the study conducted in 2022, the “Coinbase” institute, analyzing last year’s fall in the value of cryptocurrencies, indicated macroeconomic factors as the decisive cause, and not the weakening of the prospects of cryptocurrencies themselves.
External factors can significantly affect the value of any asset.
The volatility of cryptocurrencies characterizes their rapid technological development and change.The risks are high, as are the potential gains or losses.In society as a whole, cryptocurrencies are recognized as a very risky asset, while the investments made are not always properly perceived.
Failed investments in cryptocurrencies are sometimes described as Ponzi schemes, while losses in traditional assets of similar risk are simply seen as failed investments.Often this is just because cryptocurrencies are new and the people talking about them are not well versed in the crypto
world and blockchain technology.Read more: “Warren Buffett Sells Billions in US Stocks, Indicating Impending Recession, Says Expert”
When investing in any field, one must beware of potential scams.No industry is immune to it.
On the other hand, the risk profile of cryptocurrencies in the field of investment is comparable to other risky assets.Therefore, when making any investments, it is important to do your own feasibility studies, make decisions thoughtfully and according to the risk profile of each asset.
2023-05-15 17:35:16
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