The Ponzi Scheme 101: A Ponzi’s Life Cycle and Ways to Survive, Part 3

2 min read

We conclude our findings in a bid to help users better understand Ponzi schemes, so as to lower their investment risks.

With reference to the research discussed in Part 1 and Part 2

1. There is a ceiling in the Ponzi scheme, which is definitely impossible to grow constantly

The ceiling of the Ponzi scheme varies according to investment markets, the education background of investors and financial openness. However, once the scale reaches a certain threshold, the scheme can collapse. This is why P2P giants like Ezubao and Fanya can grow rapidly in the early stage but soon fail after reaching turnovers of billions.

Ponzi Scheme
  1. Team’s execution capability determines whether the ceiling can be reached

Although the Ponzi scheme does have a ceiling, it cannot be used to judge when the fraud team will run away. If the team lacks execution ability or ambition, the scheme can go bankrupt and the team can run away even without reaching the so-called ceiling.

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  1. The only choice is to grow exponentially, fission or multi-level distribution is just essentially inevitable “expediency”

Since the cost of interest is exponentially growing, the growth of new users must keep up with it in order to maintain the operation. When the number of users reaches a certain scale, it is difficult for the team to reach out to sufficient users using its own capability, so it turns to market by word of mouth or viral advertising. Therefore, means like fission and multi-level pyramid schemes may be the only effective options to grow exponentially in the short term.

Ponzi Scheme
  1. Be wary of a slowdown in growth, and watch out for the sudden drop in the withdrawal rate

The growth rate is the only lifeline of a Ponzi scheme.

When the growth rate starts to slow down or even decline, it is time for investors to be cautious. The team will usually take the following actions to cope with the panic withdrawal:

  1. Reduce the withdrawal rate through coercive means like lengthening the verification period and controlling public opinions;
  2. Exaggerate the profits and raise the user’s withdrawal cost, e.g. suddenly increasing the rate of return in the short run, or increasing profits through a longer lock-up period;
  3. Develop various tools or games on the platform to keep users’ money.

Remember, such behaviors can only buy some time for the team in the short term. Stay cautious when you see such signals.

Ponzi scheme

5. When the net inflow is negative, the possibility of the team running away increases

In the traditional industry, it is difficult for us to collect information about the company. However, in the blockchain field, since all data can be reviewed on the chain, the funding situation is transparent. Many Ponzi schemes need to use a public wallet address as the depositing channel. If you know its wallet address, you may have the chance to find out when the team runs away.

The Ponzi scheme dates back to 1919, and the Madoff’s $65-billion-fraud gave birth to more complex patterns. In the crypto front, models like ideological stamp, gravitational lens, and the likes are just using these conceptual names to talk big, which casts a shadow over many science fiction terms.

No matter how the model changes, the most important thing is to keep a clear mind and grasp the essence of things quickly. These findings are not only relatable to the Ponzi schemes, but also for daily life.

Alan Zhang Alan Zhang is an investor and market gazer that leverages greatly on data technology in decision-making. He is familiar with the different financial markets of China including the stock, futures and cryptocurrency market. Further, he participated in the establishment of alternative investment markets like black tea since 2014 and was responsible for the private placement of Huangshan Tourism shares ( in 2015. He is currently also a Financial Analyst at X-Order, an innovative research institute that attempts to combine cross-disciplinary fields such as distributed computing, computational game theory, artificial intelligence and cryptography to discover future extended orders. It was founded by Tony Tao, who is also a partner at NGC Ventures.

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