Don't be surprised Floyd Mayweather and DJ Khaled are caught up in a cryptocurrency scam – these 'Ponzi schemes' are becoming more common

An initial coin offering itself, even though it has all the classic features of a Ponzi scheme, is not illegal. Such exercises raised a total of $12bn in the first half of 2018 alone

“Even if they never got anything for it, it was cheap at that price. I had given them the best show that was ever staged in their territory since the landing of the pilgrims!”

That was how the conman Carlo Ponzi described his infamous scam which extracted $15m out of Americans in the 1910s.

What we now call “Ponzi schemes” have the same basic features. Original “investors” are lured in with the promise of getting rich quick. They get a payout, essentially funded by the contributions handed over by subsequent joiners rather than any genuine investment returns. More people, seeing the impressive profits earned by the original crew, rush to get involved themselves. Then, when new members stop coming through the door and the cash flow dries up, the whole thing collapses.

The launches of new cryptocurrencies – digital payment tokens – could be described as the pre-eminent Ponzi schemes of our time.

The pattern from the less scrupulous schemes is as follows. Some “entrepreneurs” announce a new digital currency, piggybacking on the relentless media hype around bitcoin. They pay a celebrity to endorse their “initial coin offering” (ICO) through his or her social media channels. The founders take receipt of the money and extract their copious “expenses”.

They watch the price of the new cryptocurrency spike in value as it tends to when there’s media coverage and celebrity-driven interest, which attracts more investors. And then… well, a study by Boston College has found that more than half of crypto startups seem to die within four months.

“The strongest return is actually in the first month,” according to one of the authors.

The investors in Carlo Ponzi’s “international reply coupon” scheme would have found something similar.

The founders of Centra Tech, who used the boxer Floyd “Money” Mayweather to promote their “centra token” in 2017, were arrested earlier this year for securities fraud. And Mayweather himself is now being sued by those who lost money.

But the official charges against the Centra Tech founders, who raised $32m ($25m), are related to their false claims in the ICO, including that they had a relationship with Visa and Mastercard.

An ICO itself, even though it shares the classic features of a Ponzi scheme, is not illegal. Such exercises raised a total of $12bn in the first half of 2018 alone, up from $7bn in the whole of 2017.

Most economists think that the claims that cryptocurrencies will one day replace the likes of sterling and the euro in the financial payments system are fantasy because these new digital tokens have none of the fundamental attributes of viable currencies.

They are, currently, neither a store of value (due to extreme swings in price), nor a unit of account (when did you last see something priced in bitcoin?), nor a medium of exchange (when did you last pay for something with a crypto token?).

But no one, certainly not economists, knows for certain what the future holds. Perhaps cryptocurrencies will one day take on these features. Perhaps the fact that the volume of a cryptocurrency is limited and they cannot be created by governments will prove to be as transformative as the hype-merchants claim. Perhaps the anonymity they allow will prove to be what most people really want. Perhaps we will one day discover that the moon really is made of cheese after all.

There’s no law against dreaming that that ICO you just bought into may really have invented the new dollar, however unlikely it might seem to most people.

Maybe people want the entertainment; “a show”, as Ponzi put it.

Ponzi spent 14 years in prison after his scam finally collapsed. His misfortune was to have been born in the wrong century.