In crypto we get scammed more than once, we learn this way that not everything is as good as we thought it was. With the trauma still in our body and mind we are cautious to enter any new investments in case we get scammed again. We call projects bad names as Ponzi and pyramid schemes, but what exactly are these and how do they differ from each other? In this article, we’ll take a look at the core differences and try to learn why we can rightfully say to some projects that they’re Ponzi and pyramid schemes. And best of all, we try to recognize them and be more careful next time we blindly invest.
The main difference between Ponzi and pyramid schemes is that Ponzi schemes focus on bringing in new investor money to pay returns to earlier investors, while pyramid schemes rely on recruiting new participants who pay up the pyramid structure. Both illegal scams run rampant not only in crypto but in every market known to man, all luring investors with empty promises of unusually high returns.
A Different Name but a Scam the Same
To start, both Ponzi and pyramid schemes are fraudulent ways to extract money from new entrants by promising high financial returns that are not easily seen in other investment tools and lure many opportunists into their traps. While they are both scams, they operate differently. By understanding what exactly the differences are we can help you avoid losing your money to them.
Differences Between Ponzi and Pyramid Schemes
Let’s take a look at how they operate differently and discuss the main differences:
Modus Operandi Ponzi Scheme
To start, a Ponzi scheme is a fraudulent strategy that lures investors with the promise of extremely high profits. But instead of earning these returns and distributing them back to its users, it simply pays these ‘high’ returns back to its investors from their own money or the money paid by new entrants.
This is thus not via the ‘unique’ methods they sold you to or their operation. By doing it this way, they attract new users who also start investing in a non-existent entity, promising returns secretly paid by other members. Because these schemes depend on a continuous infusion of new investors to support payouts, when the music stops and new investors stop coming, the house of cards collapses.
The term “Ponzi scheme” originated from the infamous case in the 1920s involving Italian-American businessman Charles Ponzi. He gave not only his name but also false promises to his clients on cheap postal reply coupons from overseas. His clients could redeem them for U.S. postage stamps and earn a profit. But fundamentally, Charles Ponzi was taking money from new deceived people to old ones. It all stopped when he couldn’t find no more new investors, leaving clients with staggering losses and his name forever connected to this kind of fraudulent scam.
A more recent and well-known Ponzi scheme in the financial sector was created by Bernie Madoff. He orchestrated the largest known Ponzi scheme in U.S. history, where the NASDAQ chairman used his reputation to entice investors into his firm that was no more than fake numbers and empty promises. His plan worked for 17 years and resulted in billions of dollars in losses for all investors. Many affected were wealthy investors, charities, universities, and banks. Madoff was sentenced to 150 years in prison in 2009 but died not much later.
How Have Ponzi and Pyramid Schemes Infiltrated the Cryptocurrency Realm?
In crypto, the terms Ponzi and pyramid schemes are for many people the same, but we know better. We can make a distinction between what is and what is not. Is Bitcoin a Ponzi? No, because it offers no high returns and has a value beyond its price only, i.e. store of value, means of payment, and immutable ledger to name a few.
Clear distinctions in ponzinomics are thus the projects that have infiltrated the cryptocurrency realm and promise high ROI, APY, APR, or returns in general. Notable examples include PlusToken and Bitconnect. Where many saw from miles ahead that these schemes lacked openness in their strategies, as they did nothing more as marketing to gain unexpected investors or speculators.
Modus Operandi Pyramid Scheme
In the same way a Ponzi scheme works, a pyramid scheme is also a “get rich quick” scam. But fundamentally the pyramid scheme works slightly differently.
Pyramid schemes involve investors buying into a “business opportunity” which requires recruiting other investors. An investor’s earnings in this scheme are tied to the number of recruits they bring in. However, the profits ultimately flow up to the scheme operator at the top of the pyramid.
When new investors are attracted, they gain the right to pay the initial investor and get paid when they attract new entrants on their own. As we can visually see already, the scheme embodies the form of a pyramid. So as the pyramid grows, the returns slow down until they dry up, because too many people are waiting to be paid.
When the music stops and no one enters anymore and payments stop or most likely the top of the pyramid rides off with all the funds into the sunsut, everyone who paid loses his money, and is left brokenhearted.
How Have Pyramid Schemes Entered the Cryptocurrency Field?
Pyramid schemes were also known in crypto when they entered when crypto was still obscure and small. These schemes raise red flags for anyone who encountered them already.
This is because unrealistically gains are promised and the core emphasis is not on the project itself, but on recruiting more people to the project. The most famous example of a pyramid schemes is OneCoin, although it was partly also a Ponzi as well. The film Fake! that tells the story about Onecoin, is coming out soon.
Are Ponzi and Pyramid Schemes Legal?
Ponzi and pyramid schemes and pyramid schemes are both illegal. They fall within the enforcement jurisdiction of the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). But this doesn’t stop them from creeping upon easily manipulated investors.
The legal implications of anyone who participates in these different schemes include fraud, embezzlement, and securities fraud accusations. All are punishable by serious jail time, so don’t even think about it
What to Do if You Have Fallen Victim to Ponzi and Pyramid Schemes in Crypto?
If you ever find yourself a victim of Ponzi and pyramid schemes, it’s crucial to take action as quickly as possible. Call a professional or a law firm that specializes in crypto fraud and explain your situation.
If you can, explore the options for a potential financial recovery. I say potential because due to the irreversible nature of cryptocurrency payments, as well as the global players that run these schemes, the chances of recovery are most of the time very slick.
Remember, staying informed is the best defense against bad opportunists who offer these poisoned apples. Always verify with others and think long enough before making financial decisions into opportunities that promise high returns with close to zero risk.
Crypto wasn’t the first to introduce a Ponzi and pyramid schemes. They all dated back to everyone reading this was even born.
To summarize, in a Ponzi scheme, investors invest upfront in what seems to be a legitimate investment product but the showrunners continue to recruit new investors and use their money to pay fabricated “returns” to prior investors. In a pyramid scheme, the investors are themselves incentivized to search for more people who want to join in order to get paid more. But this all stops when the top layer runs off with the money and all lines are cut.
That’s why we should always exercise caution and do our research before making any investment decisions, this in crypto but also anywhere else in life itself.