Crypto Ponzi and pyramid schemes: how they work and the red flags to watch for

“Earn 1% a day on your crypto.” “Our trading bot pays weekly, like clockwork.” “Recruit three friends and your returns double.” Promises like these have pulled billions of dollars into schemes that were never investing anything at all.

Ponzi and pyramid schemes are older than crypto, but crypto gives them new costumes: trading bots, mining farms, lending programs and smart contracts. This guide explains how the schemes work, what the SEC has found in real cases, and the red flags that give them away.

What a Ponzi scheme is

The SEC defines a Ponzi scheme as an investment scam that pays supposed returns to existing investors from money contributed by new investors. Organizers usually promise to invest in something that generates high returns with little or no risk. In many schemes, says the SEC, there’s no real investing at all: the organizers focus on bringing in new money to pay earlier investors, and divert some of it for themselves.

A pyramid scheme works through recruitment. In the SEC’s words about one crypto example, investors earned profits by recruiting others into the scheme.

Both share a fatal flaw: they need ever more new money. When recruitment slows, or too many people try to withdraw at once, the scheme collapses.

Why crypto attracts Ponzi schemes

The SEC warned years ago that Ponzi organizers often use the latest innovation or technology to make their pitch, because people are often less skeptical of something new or “cutting-edge”. It also noted that fraudsters may be drawn to virtual currencies because they’re seen as offering more privacy and less regulatory oversight.

The SEC’s position is clear: an investment in securities in the US is subject to SEC jurisdiction whether it’s paid for in dollars or in a virtual currency, and people selling investments are typically subject to federal or state licensing.

Three SEC cases, three costumes

BitConnect: the “trading bot”

In September 2021 the SEC sued BitConnect, its founder and its top US promoter, alleging they defrauded retail investors out of $2 billion. According to the SEC:

• From early 2017 to January 2018, BitConnect offered a “Lending Program”.
• It claimed a proprietary “volatility software trading bot” would use investors’ deposits to generate exorbitantly high returns.
• Instead of trading, BitConnect and its founder allegedly siphoned off investors’ funds to wallets they and others controlled.
• A worldwide network of promoters was paid commissions, much of it concealed from investors.

Forsage: the “smart contract”

In August 2022 the SEC charged 11 people over Forsage, which it called a fraudulent crypto pyramid and Ponzi scheme that raised more than $300 million from millions of retail investors. The SEC alleged that:

• Forsage let investors enter transactions through smart contracts on the Ethereum, Tron and Binance blockchains.
• Investors earned profits by recruiting others, and money from new investors was used to pay earlier ones.
• The scheme kept running despite earlier cease-and-desist actions by regulators in the Philippines and Montana.

The SEC’s message: fraudsters can’t get around securities laws by building their schemes on smart contracts and blockchains. See what is a smart contract?

HyperFund: the “mining operation”

In January 2024 the SEC charged HyperFund’s founder and a top promoter over HyperFund, a crypto pyramid scheme that raised more than $1.7 billion from investors worldwide. According to the SEC:

• From June 2020 to early 2022, the two sold “membership” packages that they claimed guaranteed high returns, including from supposed crypto mining and links to a Fortune 500 company.
• HyperFund had no real source of revenue other than investors’ money.
• In 2022 it collapsed and investors could no longer withdraw.

The same pattern appears in the CFTC’s case against Mirror Trading International, a “bot trading” pool that took more than $1.7 billion in bitcoin and, according to the CFTC, operated as a Ponzi scheme. See AI crypto trading bot scams.

Ponzi or pyramid?

Several of these schemes were described as both. The difference is in where the money appears to come from:

• In a Ponzi scheme, returns are paid to earlier investors out of new investors’ money, while the promoter claims they come from trading, mining or some other activity.
• In a pyramid scheme, people earn mainly by recruiting others, who must pay to join.

The FTC explains how to tell a pyramid scheme from a legitimate multi-level marketing business: in a legitimate one, you can earn from sales to retail customers without having to recruit new members. Its warning signs include extravagant earnings promises, an emphasis on recruiting as the real way to make money, high-pressure tactics, and having to keep buying to stay active or qualify for bonuses. Crypto schemes often swap “products” for membership packages, staking “plans” or trading bot subscriptions, but the structure is the same.

The SEC’s red flags

The SEC lists red flags that many Ponzi schemes share:

• High returns with little or no risk. Every investment carries risk, and higher returns usually mean more risk. Treat “guaranteed” returns with skepticism.
• Overly consistent returns. Real investments go up and down. Be suspicious of returns that stay steady whatever the market does.
• Unregistered investments. Ponzi schemes typically involve investments not registered with the SEC or state regulators.
• Unlicensed sellers. Many schemes involve unlicensed individuals or unregistered firms.
• Secret or complex strategies and fees. Avoid investments you don’t understand or can’t get full information about.
• Paperwork problems. Excuses for why you can’t see information in writing, or errors in account statements.
• Trouble getting paid. Missed payments, difficulty cashing out, or pressure to “roll over” your returns for a higher rate.
• Affinity. Fraudsters often exploit trust within a group sharing a national, ethnic or religious affiliation, sometimes through respected members who may not know it’s a fraud.

Crypto-specific signs to add:

• Fixed daily, weekly or monthly percentages, like the “at least 10% a month” that the CFTC says Mirror Trading International guaranteed.
• Referral levels or team bonuses for recruiting, as in Forsage and Mirror Trading International.
• A “trading bot”, “mining” or “arbitrage” story that you can’t verify. The SEC’s alert describes an early bitcoin case built on a supposed arbitrage business.
• Withdrawal limits that suddenly appear, or fees to unlock your balance.

How to protect yourself

1. Ask where the return comes from, and check it independently.
2. Check registration of the people and the platform. See how to check a crypto exchange is registered.
3. Be wary of recruitment. If the main way to earn is to bring in others, walk away.
4. Don’t trust a dashboard. Numbers on a screen aren’t money until you can withdraw them.
5. Talk it over with someone you trust who isn’t involved.

Losses and tax

If you lost money in a crypto Ponzi scheme, the tax rules differ by country. In the US, the IRS has an optional safe harbor for losses from Ponzi schemes (Rev. Proc. 2009-20), but only in limited circumstances: the scheme’s lead figure must have been the subject of a criminal complaint, with an admission of the crime, a receiver or trustee appointed, or the scheme’s assets frozen. An IRS Chief Counsel memo from 2025 found that typical scam victims whose scammer was unknown and uncharged couldn’t use it, though they could still have a deductible theft loss if they had invested for profit. See crypto scam losses and tax.

If you think you’re in a Ponzi scheme

• Stop adding money, and don’t recruit anyone else.
• Don’t pay fees to unlock a withdrawal.
• Keep records of every deposit, withdrawal, message and the names of promoters.
• Report it: in the US, to the SEC (tips at sec.gov) and the FBI at ic3.gov; in the UK, to Report Fraud and the FCA; in Canada, to the Canadian Anti-Fraud Centre and your provincial securities regulator. See crypto scams and where to report them.
• Ignore recovery offers from strangers. See crypto recovery scams.

Related: crypto lending and earn accounts, the TerraUSD collapse and pig butchering scams.