What the heck is binancesfund? …And some other stuff

— By Pierre Chidiac

Binancesfund made headlines last week in the Lebanese community, as an estimated $300 Million was stolen from Lebanese people by one of the most successful Ponzi schemes this country has known to date, second only to the one carried out by the Lebanese banking system over the course of 30 years.

One would think that after being failed by the banks to whom they entrusted their money, people would learn to be careful with who they give control over their funds; yet, human greed seems to always get in the way of rational behavior and critical thinking, as Ponzi schemes aren’t a “new” form of scam, in fact, they are one of the oldest tricks in the book.

A brief history of Ponzi schemes

But, what is a Ponzi scheme anyway ?

A Ponzi scheme is a fraudulent business model where a person attracts capital, promising investors high returns in short periods of time, and then paying those returns from the money that flows in from new investors; theoretically, it could keep on going indefinitely, however, when there is a decline in new investors, the music stops and the scammers runs off with the money. Different variations of Ponzi schemes exist today, some of the most popular ones being High Yield Investment Programs and Pyramid schemes. Pyramid schemes are different in the sense that they require from the “investor” to help market the scam pay him only for the people he brings in, not for the money he invests.

As the name suggests, Ponzi schemes are named after Charles Ponzi, a 20th century fraudster who scammed his way into history by running the most popular instance of this scheme back in his day. Despite not being the inventor of this scam model, somehow he managed to get it named after him. However, the largest Ponzi scheme in modern history belongs to Bernie Madoff, who managed to steal tens of billions of dollars over the course of 50 years.

The reason for their success

Humans are essentially emotional and rational creatures, and often times, it takes a lot of effort to keep the decision making based on reason instead of emotions and desires. This effort is dependent on the magnitude of the emotion we’re fighting. Generally speaking, one of the hardest desires to control is greed. If greed takes possession of a person, they will start obsessing over material gains, an obsession which will eventually turn into wishful thinking, and eventually, loss of everything at stake, as this wishful thinking will turn into blind faith in whatever it is that they are invested in. This is the reason gambling is addictive, because it makes people believe that they can win incredible amounts of money, so they end up risking a lot more than they can afford to lose, and lose it, eventually. These are the same mechanics that drive those who invest in Ponzi schemes.

Yet, one might say, at least in traditional gambling somebody has to win, since it’s a zero-sum game, which gives reason for hoping to win, but if no one has ever benefited from Ponzi schemes, then why do people keep pouring money into them?

First, even in traditional gambling there is a saying that goes: “The house always wins.” In the sense that even those who win on a table of poker, since they are driven by greed, probably won’t apply proper risk management and keep playing until they lose. Very few are the people who quit while they’re ahead.

Second, before addressing the question, we want to mention that it is true that one has a higher probability of success in a regular casino than in a Ponzi scheme, because of one simple reason which is called the Lindy effect. In simple terms, the Lindy effect theory states that something’s future life expectancy is as long as the time it has already been around. Take for example Casinos, they are as old as time, which means that they probably will remain around for a long time into the future, and will not run off with your money. However, when dealing with something like binancesfund, which is less than a year old, there is an extreme degree of uncertainty concerning the time the music will stop. Therefore, probabilistic-ally speaking, gambling in a Casino is safer than investing in Ponzi schemes. (Disclaimer : THIS DOES NOT MEAN THAT WE ENCOURAGE GAMBLING IN CASINOS, IT IS A SIMPLE MATHEMATICAL ANALYSIS OF 2 SITUATIONS).

To answer the question, the people who invest in HYIP (High Yield Investment Programs) can be classified in two categories; either:

  1. They’re not very educated financially, don’t really know it’s a scam and naively put money into it; or
  2. They know it’s a scam and hope to maximize their profit by either bringing in as many people as they can, and by doing so they become scammers too, or simply getting in and out early before the scam shuts down, which also makes them guilty since they know their profit is someone else’s capital.

The first category of people gets drawn in by two main ideas (which are essentially red flags), that are “get rich quick” and “risk-free profit”. These are the two things people seek the most when it comes to finance, which is why most people end up not doing very well financially. The key to financial success is to build something of value to society and monetize it, and it usually takes time, which is why people often neglect the hard path hoping to find shortcuts, this is where Ponzi schemes, MLMs, HYIPs etc.… find their time to shine.

In Lebanon, these things have a particular success because of many factors, one of them being that the state has been conditioning the people to believe that it’s the best way to succeed financially by running its own Ponzi scheme which lasted for 30 years, and eventually led to an entire generation of people believing that the best form of investment is to put money in the bank as opposed to opening a business or investing in one. The result of this was that the bubble popped, an entire nation lost all of its life savings, and there’s nothing left except a bunch of people who have no skills to benefit the economy since they have been living on passive income for decades. Looking at it from this perspective, one might understand why Lebanese people rushed to get into binancesfund, hoping to gain back what they lost to the banks, and eventually to resume their former lavish lifestyle, backed by nothing that is economically viable.

Crypto x Ponzi = binancesfund

Unless you’ve been living under a rock, you probably heard of Crypto. In brief, crypto, short for cryptocurrencies or crypto-assets, is an umbrella term to describe various cutting edge technologies that are revolutionizing the financial sector, and soon will revolutionize every other industry, leveraging the power of blockchain technology. Core values in the Crypto space are decentralization, openness, anonymity, and freedom. These values, along with the fact that the crypto space is relatively new (only a decade old) and unregulated, are the main factors that resulted in it being a foster environment for scams of all sorts, which are generally called rug pulls or exit scams, and are everywhere in the space. This is not to say that crypto is bad, but it is simply describing the tradeoff between security and freedom. Given all that was said, it was easy for scammers like binancesfund to find a place for themselves in the crypto space, leveraging the technology to preserve their anonymity while still being able to defraud thousands of people without it being traced back to them in real life.

Closing thoughts

To conclude, before investing anywhere, people should perform due diligence, apply risk management, and most importantly, invest only what they can afford to lose. With that being said, when talking about the crypto space, people should be ten times more careful since it is a very volatile market, and a highly unregulated market, which means that it is up to every individual to take care of their own security, their funds and who they trust with it.





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