Pyramid Scheme

How it Works

The pyramid scheme arrangement is characterized by its structure. At the top of the pyramid is usually one person or entity, with layers of "investors" underneath in a hierarchical order. The scheme is built on the principle of recruiting new investors and using their investments to pay off the earlier backers. This means that the entire scheme relies heavily on a continuous influx of new investors.

• The initial promoters stand at the top of the pyramid and form the first level.
• New participants who are added become part of the subsequent level and are required to finance the level above them, usually through a fee or investment.
• These new investors are then encouraged to recruit more investors to further fund the scheme.
• The investors at the lower levels typically end up losing all of their investment when the number of new recruits fails to sustain the payment structure.

Cryptocurrency and Pyramid Schemes

It's important to understand that cryptocurrencies by themselves are not pyramid schemes. However, their ease of use, transnational nature, and seeming lack of regulation have made cryptocurrencies an attractive vehicle for some pyramid schemers.

Pyramid schemes in the cryptocurrency world often start with an unknown, and sometimes untraceable, promoter who presents an opportunity to invest in a new coin, promising high returns. Often, these returns are "guaranteed" by the value of an established cryptocurrency, such as Bitcoin. The goal for the participants is to bring in more investors, increasing the value of their own investment.

Warning Signs of a Pyramid Scheme

Since pyramid schemes are unsustainable and illegal, it is essential to be aware of their common warning signs. These may include:

• Guaranteed high rates of return: If the returns sound too good to be true, they probably are.
• Recruitment emphasis: Schemes often emphasize the benefits of recruiting new investors.
• Complex commission structure: Pay attention to whether payments are based on the recruitment of new members or the sale of the company's products.
• Pressure selling: High-pressure sales tactics are often used to rush you into making an investment.
• No clear product or service: If there isn't an actual product or service being sold, it might be a pyramid scheme.