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Opinion & Analysis

Clear telltales of Ponzi scheme in the making

Fraudsters use genuine asset class such as Bitcoin to lure unsuspecting investors. FILE PHOTO | NMG
Fraudsters use genuine asset class such as Bitcoin to lure unsuspecting investors. FILE PHOTO | NMG 

In the past one week, two friends separately approached me to check out some wonderful investment opportunity.

What’s interesting was that each opportunity involved bitcoin and promised monthly returns in the double digits. No doubt bitcoin has had a spectacular run this year but something wasn’t right.

All opportunities fit the characterisation of a Ponzi scheme – an investment scheme built on paying out old investors with money brought in from new ones.

Later after this episode, I kept on wondering; what if there are other investors handing their life savings to swindlers? For that, allow me to share a few thoughts on how to stay safe.

First, ask the right questions. Most scams like to associate themselves with a certain asset class – in this case bitcoin. The reality is that most of these schemes run swindles but use a proper asset class to disguise their true nature.

Probed a little, you’re likely to discover a glaring disconnect between the performance of the purported asset and the returns being generated.

Questions to ask may include; why is the return so abnormally high relative to its underlying asset? Why is the return higher relative to other asset classes? What institutions are investing with them? What’s their track record? Is the business licensed in some form or fashion?

Are they comfortable that any financial regulator is made known of their existence? In addition, as a basic rule of thumb, ignore anyone promising over 10 per cent a month. Also avoid “complex strategies” that cannot be divulged. 

Second, do your own homework. The value of doing research before investing cannot be overstated. Don’t fall for the usual trick used by these schemes – using your friends and family to do their bidding.

In fact, this strategy has become common that it now has its own name: affinity fraud. The reasoning is simple: we trust people we think are like ourselves. Ponzi schemes are almost always based on exploiting the trust of a tight social network.

A good number of Kenyans who lost an estimated Sh5 billion in pyramid schemes sometime back were preyed on by church members.

To avoid this affinity trap, simply researching on these areas might save you a fortune; identity of the organisers behind the venture, their qualifications, revelations from former working colleagues, court cases and so on. You’ll be amazed at what you find.

Thirdly, if part of the operation will involve bringing other members, then run. In a Ponzi scheme, new investors are needed to be brought in to pay back the old investors.

There’s never any actual investment; the debt just rolls over. This means that the scheme requires an endless supply of new investors.

In closing, Ponzi schemes are real and may be making a comeback. Don’t be a fool to easily part with your hard-earned money.

But just in case you’ve invested in such schemes, quickly cut your losses. But in case, you only want to test, just make sure all your investment eggs are not in one basket.

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