Pyramid Selling and Ponzi Scheme
Most people who invest in Bitcoin or any cryptocurrency or decide to participate in an Digital Coin Offering (ICO) are generally concerned about two things. The first is the Return on Investment (ROI), which represents the profit they will make from the initial investment, then the second concern is the amount of risk involved in the investment. When risks are too high, investors are more likely to lose (some or all) of their initial investment, resulting in a negative Return on Investment (ROI).
Naturally, there is always some risk in all investments. However, the risk is greatly increased in cases where the investor unknowingly invests in a Ponzi or pyramid scheme that is prohibited by law. Therefore, it is of great importance to be able to identify these schemes and understand how they work.
What is the Ponzi scheme?
The Ponzi scheme is named after Charles Ponzi, an Italian fraudster who moved to North America and became famous for his fraudulent money-making system. In the early 1920s, Ponzi managed to defraud hundreds of victims and maintained the scheme for more than a year. Essentially, a Ponzi scheme is a fraudulent investment scam that works by paying old investors with money collected from new investors. The problem with such a scheme is that the investors in the background will not get paid at all.
An active Ponzi scheme looks more or less like this:
The person who promotes an investment opportunity receives 1000 liras from the investor. It promises to repay the initial amount along with 10% interest at the end of a predefined period (e.g. 90 days).
The person introducing the investment opportunity can thus include two additional investors into the system before the completion of the 90-day period. Then, with the 2000 lira collected from the second and third investors, he will be able to pay 1100 lira to the first investor. Thus, it will probably convince the first investor to invest 1000 lira again.
By using the money from new investors, the fraudster will be able to pay the promised returns to the original investors and persuade them to reinvest and invite more people.
As the system grows, the person promoting the investment opportunity must find more new investors to keep the scheme going, or he or she will be unable to pay the returns he promises.
Eventually, at some point the order becomes unsustainable and the person who introduced the investment opportunity is either caught or disappears with whatever money he has left.
What is a Pyramid Selling Scheme?
A pyramid selling scheme (or pyramid selling scam) operates in business as a model that promises payments or rewards for members who not only join the scheme but also manage to bring new members into the scheme.
For example, the person promoting the fraudulent investment opportunity offers Ayşe and Ahmet the chance to get a distributorship right in a company worth 1000 liras each. Thus, Ayşe and Ahmet gain the right to sell their distributorships and receive a share from every member they bring into the system. The 1000 liras collected from the distributorship sales they sell are then shared half-and-half with the person who introduced the fraudulent investment opportunity.
In the example above, since Ayşe and Ahmet only earn 500 lira per sale, they will each have to sell at least two distributorships even to cover their losses. Customers in this situation will then be burdened with selling two distributorships in order to recover their initial investment. Since many more members are needed to continue this process, order breaks down at some point. What makes the Pyramid Selling scheme illegal is that this scheme is unsustainable.
Most Pyramid Selling schemes do not offer a product or service and survive solely on the money earned from new members recruited into the system. However, some pyramid selling schemes may present themselves as legitimate multi-level marketing (MLM) companies by claiming to sell a service or an actual product. But they often do this to hide their underlying fraudulent activities. For this reason, many multi-level marketing (MLM) companies with questionable business ethics/ethics use pyramid sales models, but it should be noted that not all multi-level marketing (MLM) companies are scams.
Ponzi Chain and Pyramid Selling
Similarities
Both are forms of financial fraud that entice victims to deposit money by promising good returns.
Both need regular inflows of money into the system from new investors to be successful and survive.
Often, these layouts do not offer actual products or services.
Differences
Ponzi schemes are generally offered as investment management services where participants believe that the return they will earn is the result of a legitimate investment. In the simplest terms, the fraudster defrauds other people in the system in order to pay people in the system.
Pyramid selling schemes are based on network marketing and require participants to recruit new members into the system to make money. This way, each participant at the bottom of the pyramid receives a small commission before sending the money to the top of the pyramid.
How do you protect yourself in this situation?
Be skeptical. An investment opportunity that promises quick or high returns with minimal investment is most likely not real. This is especially true when investing in something that is completely foreign to you or difficult to understand. If it sounds too good to be true, it probably is.
Beware of opportunities offered to you unsolicited. An unexpected invitation to take part in a long-term investment opportunity usually signals a red flag.
Research the seller. The institution promoting the investment opportunity should be investigated. A reputable financial advisor, broker or brokerage firm will be registered and monitored by the appropriate governing bodies.
Don't trust. Verify. Lawful investments must be legally registered. The first thing to do is to ask for registration information. If the investment opportunity is not registered, a good and reasonable explanation must be given about it.
Make sure you understand investing. You should never invest money in something you do not fully understand or comprehend. Be sure to take advantage of available sources of information and be very wary of dubious investment opportunities hidden behind secrecy.
Report it. Whenever investors encounter a pyramid selling scheme or Ponzi scheme, they must report it to the relevant authorities. This way, future investors will be protected from falling victim to the same scam.
Is Bitcoin a pyramid selling scheme?
Some may argue that Bitcoin is a massive pyramid selling scheme, but this is simply not true. Bitcoin, simply put, is money. It is a decentralized digital currency that is secured by mathematical algorithms and cryptography and can be used to purchase goods and services. Like fiat money, cryptocurrencies can be used in pyramid selling schemes (or other illegal activities), but this does not mean that crypto or fiat currencies are pyramid selling schemes.
