How to Identify a Ponzi

[nrd525]

I'm interested in developing a list of questions/variables that are associated with Ponzis.

Here is my short list.  Please add items to this list and I'll edit the post.

Ponzi Indicators
1. High rate of return
Explanation: ponzi schemes typically offer very high rates of return that are not possible.  Anything that is > 50%/year APR is suspicious.  Anything > 500% APR is very suspicious.  Ponzis can offer lower rates as well (see Maddoff - 10% APR), but these are less common.

2.  Provides no evidence of business activity
They refuse to show what they are investing their capital, what products(s) or services they are selling, and who the customers are.  By contrast a mining corporation will be able to provide pictures of hardware and statistics of how many BTC generated per month.

3. Business activity is "speculation"
Speculation doesn't make steady rates of return. In fact the return rate should often be negative.

4. Steady rates of return
When combined with a high rate of return that is greater than the market rate of return this is suspicious.

5. Increasing demand for capital
Unlike a regular business which has its largest demand for capital at the start, the ponzi starts off with a very small amount of capital ("refuses" deposits), and then grows rapidly.  An increasing demand for capital makes sense only if the business can show what the money is being used for.  A ponzi will need to have its capital grow at a standard rate that exceeds the withdrawals, whereas a legitimate business will have a varying rate of investment (and this rate will often hit zero).

6. Operator hides their identity
If the name and identity of the person who runs this project is publicly known, and they live in a jurisdiction where it would be easy to prosecute them then they are less likely to run away with the money.  Though there are exceptions to this (perhaps too many for this to be a good indicator?).

7. A Super Majority of Non-Investors view it as a Ponzi
If a business is only defended as legitimate by those who are invested in it, while the overwhelming majority of individuals who have no money to gain from taking a position see it as a ponzi -- it is likely that the non-investors are more trustworthy in their assessment.

8. They advertise a "Limited Availability"
They have a low demand for funds.  Especially in the early phase.  Ideally they've got people chomping at the bit to be included in the scheme.

9. They have "Pass-Throughs".
Tentatively this seems like a good indicator. I don't think pass-throughs are typically used in regular project funding.  It increases the distance between the investor and the fund-owner and acts as a shield/distraction.  It is more indicative of money laundering.


First-Hand Ponzi Accounts
Chasing Maddoff - movie
The Man Who Would Be Polka King - movie account of a polka performer / ponzi that stole $5-$10 million.

EVE Ponzi First Hand Account
http://web.archive.org/web/20091026234156/http://geocities.com/currintrading/
http://web.archive.org/web/20091021193732/http://geocities.com/currintrading/bank.html

Books  
(I haven't read them but the Amazon reviews look good)
http://www.amazon.com/Robbing-You-Keyboard-Instead-Gun/dp/1453895299/
http://www.amazon.com/The-Vigilant-Investor-Fraud-Proof-Investments/dp/0814417507



Vladmir's Resources
Thread: https://bitcointalk.org/index.php?topic=91643.0

There are many resources dedicated to helping people to recognize and avoid scams:
http://www.sec.gov/answers/ponzi.htm
http://www.fsa.gov.uk/consumerinformation/scamsandswindles
http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/02597.html
http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/vwapj/Little-Black-Book-Scams-e.pdf
http://www.kpmg.com/ca/en/whatwedo/specialinterests/at-risk-magazine/pages/ponzischemes%E2%80%93howtorecognizethem.aspx
http://www.fbi.gov/scams-safety/fraud/


There is some action that can be taken by people to protect themselves and others:
http://www.fsa.gov.uk/consumerinformation/if_things_go_wrong
http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/02801.html


Reports on Ponzis
http://www.marquetinternational.com/pdf/marquet_report_on_ponzi_schemes.pdf

[ErebusBat]

9. occams razor

[Shadow383]

First-Hand Ponzi Accounts
Chasing Maddoff - movie

EVE Ponzi First Hand Account
http://web.archive.org/web/20091026234156/http://geocities.com/currintrading/
http://web.archive.org/web/20091021193732/http://geocities.com/currintrading/bank.html

"Chasing Madoff" was really very interesting, here's an interview with the guy who first proposed Bernie as a ponzi op:
http://youtu.be/cfwJ06hc0_8?t=4m48s (the whole thing's very interesting and relevant)
http://www.youtube.com/watch?v=s68FR1MXT8Q

But yes, I would've thought that due diligence requires any sensible investor to go over the steps outlined in here before handing someone any considerable amount of cash. It is almost certain that some of the deposit schemes on offer here are illegitimate.

[elux]

Anyone got recommendations for good, technical, analytical books on ponzi schemes? 

(This is interesting, this is not.)

[koin]

Anyone got recommendations for good, technical, analytical books on ponzi schemes? 

http://www.amazon.com/The-Vigilant-Investor-Fraud-Proof-Investments/dp/0814417507

[Valalvax]

Ponzi Indicators
1. High rate of return
Explanation: ponzi schemes typically offer very high rates of return that are not possible.  Anything that is > 50%/year APR is suspicious.  Anything > 500% APR is very suspicious.  Ponzis can offer lower rates as well (see Maddoff - 10% APR), but these are less common.

So basically what you're saying is nearly every single Bitcoin investment/loan/offer is a ponzi, because I don't think there are many at all that offer less than 50% a year

[dust]

Ponzi Indicators
1. High rate of return
Explanation: ponzi schemes typically offer very high rates of return that are not possible.  Anything that is > 50%/year APR is suspicious.  Anything > 500% APR is very suspicious.  Ponzis can offer lower rates as well (see Maddoff - 10% APR), but these are less common.

So basically what you're saying is nearly every single Bitcoin investment/loan/offer is a ponzi, because I don't think there are many at all that offer less than 50% a year

These indicators are just things to look out for when investing.  Investments that fit multiple indicators have an increased risk of being a ponzi.

[fabrizziop]

Ponzi Indicators
1. High rate of return
Explanation: ponzi schemes typically offer very high rates of return that are not possible.  Anything that is > 50%/year APR is suspicious.  Anything > 500% APR is very suspicious.  Ponzis can offer lower rates as well (see Maddoff - 10% APR), but these are less common.

So basically what you're saying is nearly every single Bitcoin investment/loan/offer is a ponzi, because I don't think there are many at all that offer less than 50% a year

These indicators are just things to look out for when investing.  Investments that fit multiple indicators have an increased risk of being a ponzi.

Exactly. You see Starfish BCB. They offer about 70% APR, but you see the full report on lending status/defaults/earnings, making it to me a safe investment.

[John (John K.)]

Ponzi Indicators
1. High rate of return
Explanation: ponzi schemes typically offer very high rates of return that are not possible.  Anything that is > 50%/year APR is suspicious.  Anything > 500% APR is very suspicious.  Ponzis can offer lower rates as well (see Maddoff - 10% APR), but these are less common.

So basically what you're saying is nearly every single Bitcoin investment/loan/offer is a ponzi, because I don't think there are many at all that offer less than 50% a year

These indicators are just things to look out for when investing.  Investments that fit multiple indicators have an increased risk of being a ponzi.

Exactly. You see Starfish BCB. They offer about 70% APR, but you see the full report on lending status/defaults/earnings, making it to me a safe investment.

This +1.
The lack of transparency should be added to the list too.

[hgmichna]

I'm interested in developing a list of questions/variables that are associated with Ponzis.

Here is my short list.  Please add items to this list and I'll edit the post.

Ponzi Indicators
1. High rate of return
Explanation: ponzi schemes typically offer very high rates of return that are not possible.  Anything that is > 50%/year APR is suspicious.  Anything > 500% APR is very suspicious.  Ponzis can offer lower rates as well (see Maddoff - 10% APR), but these are less common. ...

I would add that quoting interest rates weekly or monthly, rather than the proper annual rate, is a sure sign of an illicit scheme. It aims at very inexperienced investors.

[PatrickHarnett]

I'm interested in developing a list of questions/variables that are associated with Ponzis.

Here is my short list.  Please add items to this list and I'll edit the post.

Ponzi Indicators
1. High rate of return
Explanation: ponzi schemes typically offer very high rates of return that are not possible.  Anything that is > 50%/year APR is suspicious.  Anything > 500% APR is very suspicious.  Ponzis can offer lower rates as well (see Maddoff - 10% APR), but these are less common. ...

I would add that quoting interest rates weekly or monthly, rather than the proper annual rate, is a sure sign of an illicit scheme. It aims at very inexperienced investors.

I'll disagree with that for two reasons.

1: Most of the loans are denominated in weekly or monthly rates and the way bitcoin works, an annual rate is less meaningful.  People don't look for 12-month instruments, 4 or 10 weeks is heaps (months are still like years).
2: The APR system used in the USA is a very poor indicator that is quite confusing and misleading for non-US people - took me ages to work it out, and it is terrible.

In the WPW I settled on a one month equivalent rate to rank the interest or return being paid.  Over one year, the difference between compounders and weekly payers would be huge.

[ErebusBat]

I'm interested in developing a list of questions/variables that are associated with Ponzis.

Here is my short list.  Please add items to this list and I'll edit the post.

Ponzi Indicators
1. High rate of return
Explanation: ponzi schemes typically offer very high rates of return that are not possible.  Anything that is > 50%/year APR is suspicious.  Anything > 500% APR is very suspicious.  Ponzis can offer lower rates as well (see Maddoff - 10% APR), but these are less common. ...

I would add that quoting interest rates weekly or monthly, rather than the proper annual rate, is a sure sign of an illicit scheme. It aims at very inexperienced investors.

I'll disagree with that for two reasons.

1: Most of the loans are denominated in weekly or monthly rates and the way bitcoin works, an annual rate is less meaningful.  People don't look for 12-month instruments, 4 or 10 weeks is heaps (months are still like years).
2: The APR system used in the USA is a very poor indicator that is quite confusing and misleading for non-US people - took me ages to work it out, and it is terrible.

In the WPW I settled on a one month equivalent rate to rank the interest or return being paid.  Over one year, the difference between compounders and weekly payers would be huge.

^^^ That.... bitcoin is not (currently) like mainstream financial markets.

[hgmichna]

I'll disagree with that for two reasons. …

My remark was written for the person who asked, not for crooks that are part of an ongoing Ponzi scheme, which, notably, quotes its interest by the week.

[PatrickHarnett]

I'll disagree with that for two reasons. …

My remark was written for the person who asked, not for crooks that are part of an ongoing Ponzi scheme, which, notably, quotes its interest by the week.

I was actually referring to the rates often quoted for loans to members, a practice established before deposit taking was the norm.

I would also like to clarify if you comment is an accusation that I am a criminal?

[Vladimir]

2: The APR system used in the USA is a very poor indicator that is quite confusing and misleading for non-US people - took me ages to work it out, and it is terrible.

True.

US version of APR is simply ridiculous. UK version of APR is much more reasonable as it takes in account compound interest. In case of pirate it could be the difference between ~300 and ~3000 APR between US and UK version. Less confusing would be using AER. See this http://en.wikipedia.org/wiki/Annual_percentage_rate for details.

[ripper234]

I would add that quoting interest rates weekly or monthly, rather than the proper annual rate, is a sure sign of an illicit scheme. It aims at very inexperienced investors.

It is not, at least not in this case.

Bitcoin is super volatile, and so are business models built upon it.
Nobody can guarantee a yearly interest rate in Bitcoin loans, a weekly rate makes much more sense in this case, since the rates change frequently.

[ripper234]

I'll disagree with that for two reasons. …

My remark was written for the person who asked, not for crooks that are part of an ongoing Ponzi scheme, which, notably, quotes its interest by the week.

To the best of my judgement, Patrick Harnett is not operating a ponzi scheme (and I have some BTC riding on that conjecture).

Here is my reasoning.

[ripper234]

P.S.

I think having this thread as a sticky is a good thing.

People should think very carefully before investing with some of the lenders advertised here. But I will not make the leap of calling them Ponzis.

 - Bitcoin Saving & Trust may be a Ponzi (I wouldn't care to name the odds for this, I have too little information).

 - Pass-through schemes are not ponzis ... they are very upfront about what they do. (That is, unless their issuer has a separate intention of disappearing/defaulting ... but if Pirate defaults, they are not Ponzis).

 - Insured accounts are most likely not ponzis (some are less likely than others).

[Vladimir]

https://bitcointalk.org/index.php?topic=91643.0

[totaleclipseofthebank]

What I think of BTC HYIPs:



Maybe mythology can teach us a lesson here!