If they were legit then BTC payments should be being sent to an exchange, converted to dollars, and then used to purchase hardware/electricity/etc.
Not per se. If they have 1 Petahash running on SHA-256 and have only sold half of it, every new sale could be used to payout in BTC for new customers as the hardware/costs have already been paid.
If you're a one man operation with your own hardware it makes sense to send BTC to an exchange if you need that to pay for electric. But if you have fiat at hand to pay without the need to convert BTC the "cycle" is broken. Considering that GAW has thousands of streams of coins (whether btc or fiat or else) chances that your payout is going to be converted to USD to pay for new hardware are small.
GAW doesn't have "thousands of streams", it all comes from mining ltc and/or btc. There are no other coins that can support the amount of hashrate they claim.
In your example, if they had 1 PH/s and sold half they would immediately convert the payment to USD and buy another 0.75 PH/s to sell.
It makes no sense to keep the payment and use it to payout mining earnings.
With thousands of streams I also mean any "payments" coming in. A friend of mine who I referred got a free Genesis 10Gh/s and bought another one. That 0,018 BTC is inflow for GAW. They don't collect all those bits and pieces until they need 475 Gh/s extra and order 1 Ant S3 (for example).
If they for example are pointing their mining income to a cold wallet address it could just stack up there and be spent on new hardware once BTC goes up a bit. With low rates it makes no sense to convert BTC to USD and into hardware. Waiting for BTC to raise 10% in value will give you 10% more mining speed for the same BTC.
If all streams coming in are big enough to fund the outflow in payments and withdrawals, then yes, effectively newcomers pay the income for older clients. Difference in that sense with a ponzi is that there is the actual mining result that's flowing into the cold wallet. So by itself having "payments in" being used for "payouts to other clients" isn't by default a bad thing.