A Ponzi scheme is a fraudulent investment operation that pays returns to investors using funds collected from new investors. It's essentially a pyramid scheme focused on cryptocurrency in this case. These schemes often attract investors with the promise of high returns at unusual speed compared to traditional investments.
The Enforcement Directorate, a financial investigation agency in India, has attached assets belonging to Shilpa Shetty's husband Raj Kundra worth Rs 98 crore (approximately $12.25 million).
This action is part of a larger investigation into money laundering allegedly linked to a Bitcoin Ponzi scheme.
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This is a classic sign of a Ponzi scheme, where early investors are paid out using money from new investors, creating an illusion of profitability.
The scheme was unsustainable, and eventually, when they couldn't get enough new investors, the payouts stopped.
Lifecycle of Ponzi schemes.
Initially, these schemes may operate as legitimate businesses. However, they may turn to fraudulent practices when they fail to meet operational income requirements.
This situation might arise in scenarios such as a hedge fund facing unexpected losses and thus, unable to deliver promised returns legitimately.
To mask these failures, operators might resort to falsifying earnings reports.
To build trust, operators often provide initial payouts that are relatively attractive, encouraging investors to reinvest their earnings or attract new participants.
This early success prompts a cycle where the influx of new investors’ funds is used to pay returns to earlier ones.
Sustaining the illusion.
Investors who see initial returns might choose to reinvest their money, rarely withdrawing the full amount.
Operators encourage this behaviour by showing inflated account balances, thus perpetuating the illusion of a successful investment strategy.
Some schemes also allow early investors to withdraw their money completely, which reinforces trust among the community.
Ponzi schemes can collapse under several circumstances:
1. The promoter might disappear with the investment funds, leaving no returns for the investors.
2. If new investments cease, the scheme faces a liquidity crisis, unable to fulfil return promises, leading to panic among investors.
3. External market conditions or mass withdrawal requests can expose the insufficiency of funds, prompting a rapid collapse of the scheme.
Link to this article.
Bitcoin Ponzi scheme.
Amway pyramid fraud ponzi scheme.
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