Financial pyramid and Ponzi scheme in crypto

Fraudulent financial schemes that play on people’s desire to make quick money, unfortunately, have become part of economic reality since the beginning of the 20th century. Such schemes are especially dangerous due to the secretiveness and skill of deception of the creators. They not only lure participants with fictitious “profitable” offers, but are also able to remain in the shadows for a long time, which sometimes leads to huge losses and sometimes the accumulation of debts.

Ponzi schemes and financial pyramids in classical finance, although the promises of quick enrichment are similar in nature, have a number of differences that need to be understood by every user who is not indifferent to the safety of his assets.

Unfortunately, the cryptocurrency market has not remained aloof from this phenomenon. In this article, we will try to explain the differences between a pyramid scheme and a Ponzi scheme, which can protect potential investors from fatal financial mistakes.

The essence of the Ponzi scheme is deception: payments to early investors are made not from real profits, but from the funds of new participants. These schemes require a constant influx of new investors to pay out as they have no legitimate commercial basis. The goal and source of funds is some “very profitable business. Also in this scheme it is the organizer who is the central link - he receives payments and makes them. It is not uncommon for such projects to exist for quite a long time.

Ponzi schemes are notorious for their lack of transparency, often providing little or incorrect information about their operations. Such schemes are inevitably doomed to failure and collapse when the flow of new investors decreases, leaving many of them with significant losses. In most jurisdictions, Ponzi schemes are illegal due to their fraudulent nature, and authorities actively pursue them to protect investors from financial loss.

To summarize:

Participants in a pyramid scheme are required to make an initial financial contribution, and instead of focusing on actually selling goods or services, they focus on convincing others to join the project. New members create a hierarchical pyramid structure, each of which must attract even more people. Early participants often receive payouts from the investments of later investors, creating the illusion of wealth. There is no open center of the entire scheme; participants and financial flows interact with neighboring levels of the pyramid. Financial pyramids often do not last long, although there are exceptions.

As it becomes increasingly difficult to find new partners to support the ever-expanding pyramid, such schemes are unsustainable and doomed to failure. Those at the top profit when they collapse, usually at the expense of those lower in the hierarchy who lose their investments. Due to their exploitative nature and the harm they cause to innocent people who fall into their trap, pyramid schemes are banned in many countries.

Pyramid schemes use the same model as multi-level marketing (MLM). However, MLM members can earn commissions from both selling products and recruiting new members. In contrast, pyramid schemes often lack legitimate goods or services and focus on recruiting participants without offering real value.

To summarize:

Both types of schemes deceive investors by making attractive but false promises, and most participants end up suffering significant financial losses.

People can protect themselves from fraudulent schemes first of all by following a number of simple rules. Understanding the differences between a Ponza scheme and a pyramid scheme will also make you more prepared when dealing with scammers:

As we can see, the differences between a financial pyramid and a Ponzi scheme cannot be called cardinal. Both structures follow the same goal - earning money, but both are doomed to failure and do not take into account the losses of their participants.

Both schemes are unsustainable when it becomes difficult to find new investors or participants. To summarize, Ponzi and pyramid schemes are illegal and punishable by law in most countries.