Over the last week, news of the ponzi scheme BitConnect created a wave of investors who were disillusioned and cheated by its collapse. Memes were made and lawsuits were filed, although the people behind it still seem to be peddling more ponzi schemes.
The thing is, the cryptocurrency market has evolved. This space moves so fast that traditional BitConnect-esque ponzi schemes are now old news; the real way to make money is to invest in actual, self-aware ponzi schemes. The idea for an ERC20 ponzi token was first developed by Dr. Jochen Hoenicke back in June 2017, the same person who runs the popular Bitcoin mempool stats site. If you’re new to the cryptocurrency world, it’s time to move on from BitConnect and move to these legitimate Ethereum smart contract based ponzi schemes.
Last week, ponzicoin.co started becoming popular on social media – and it’s exactly what it sounds like. Claiming to be the world’s first legitimate ponzi scheme, Ponzi Coin (Ticker: SEC) worked by doubling the price for every 100 tokens people bought. If you wanted to cash out, for every 100 tokens sold, the price would go down by 75%. This means that for you to make a profit, you’d have to bet that 300 more people will buy the token AFTER you. Since it’s very likely that there won’t be 300 more people after you, your chances of losing money are pretty high. Basically a real life ponzi scheme on the Ethereum blockchain, using smart contracts to verify it.
Sadly, after mere hours of running a successful ponzi scheme, the developer closed down the site because the joke was getting out of hand. Too many people had bought Ponzi Coin and quite a few people profited from it.
With the success of Ponzi Coin, the next generation of legitimate ponzi schemes emerged after a few hours. On January 28th, Proof of Weak Hands coin launched with a more complicated formula for their pyramid scheme. Basically whenever someone purchases a POWH Coin, the contract increases the price of the next token by a small percentage, which is around 0.25%. When a coin is sold, the value decreases by the same amount. At any point you can cash out at 90% of the current value of the coin.
The genius in it is the concept of you profiting off the “weak hands” of others. Whenever someone buys a POWH coin, existing holders get dividends which can be cashed out in the form of Ether. Essentially, the contract is built to fluctuate based on popularity of the project; if a lot of people are FOMOing in, the price increases (as do your dividends), and when people lose faith in this actual pyramid scheme to cash out, the price decreases (but you still get dividends.) If you hold through the tumultuous journey, you keep your dividends at the risk of losing potentially all of our initial Ethereum investment.
At the time of writing, the total Ethereum invested into POWH Coin is about 780 ETH, which is around $900,000 USD.
More Pyramids are Erected: POWH3 and Ethernumbers.co
With the popularity of pyramid schemes increasing over the last few days, website developers are starting to become Egyptian pharaohs. Like any traditional pyramid scheme, those who got in first are going to be rich (if they get out early), while those who come later will lose. With the social experiment twist that these projects have, it truly is a test of your inner HODL, otherwise you lose both your investment and your dividends.
Just to clarify, none of the above websites have malicious founders who will run away with your money. They’re simply social experiments to determine just how far people will go to chase cryptocurrency profits. You can check the code and smart contracts on etherscan. Would you invest in a ponzi scheme even if you knew exactly what it was?
What does this say about the current state of cryptocurrencies?
The behavior we’re seeing isn’t much different from what anyone who watches these markets are used to. People chase gains: when people find a project that increased by 30x in one day, they want to get in, despite the fact that their whitepaper may or may not literally be an SEC document advising you not to invest in Ponzi schemes. We’ve seen it multiple times in this market of pumps and dumps.
For all those CNBC types who read this article and think ‘millennials have gone crazy’, the entire thing is a joke. I doubt people savvy enough to install Metamask and put Ethereum into any of the above pyramid schemes would honestly put any money they’re not willing to lose into it. Despite this, I’ve found multiple discord groups for each of these websites encouraging shilling them on reddit, twitter and 4chan, to perhaps get some unsuspecting people who don’t realise they’re going to lose money into the system before it collapses.
Could you draw parallels between these ponzi tokens and the greater landscape of cryptocurrencies in general? I’m sure you could. People chase random pump and dumps without gauging the technology behind the product. Besides that, in any speculative asset, the price is determined entirely by what people are willing to pay for it (and I don’t count the popular cryptos like Bitcoin in this, because they do have real world, non-speculative value). When people realise the tokens they hold are worthless with no real use case, the house of cards comes crumbling down. Atleast the experiments above are entertaining and transparent.