What is a pyramid scheme?
A pyramid scheme is a fraudulent business model in which revenue is not generated by selling products or services, but by convincing new members to join. The scheme operators use the money of the newcomers to pay off the older members, moving funds within the system without creating any real value or business result. In this way, the whole scheme depends on a constant influx of new members — when they run out, the payments stop and the system collapses. Then those at the bottom of the pyramid lose the most. Pyramid schemes have been around for a long time, and one of the most famous examples is the Charles Ponzi scam from the early 20th century, after which the scams got their name. Ponzi then paid off older investors with the money of new ones, creating the impression of profitability. This scam has become so famous that the name “Ponzi scheme” is now used as a synonym for these types of scams. Laws against pyramid schemes were introduced as early as the 1930s to protect citizens, but over time, the schemes evolved and turned into multi-level marketing (MLM) models. While many MLMs are legal, regulators have introduced stricter rules to prevent abuse. The internet has further facilitated the spread of these scams and made them more difficult to identify.
Did you know? In the 1920s, Charles Ponzi lured investors by promising a 50% return on investment in just a few months, claiming to invest in international postal coupons. To maintain the scheme, Ponzi used the money of new investors to pay off the older ones, creating the illusion of profit.
Source: cointelegraph
Pyramid schemes and cryptocurrencies
Pyramid schemes with cryptocurrencies work like classic pyramid schemes. Scammers lure victims by using their curiosity for digital currencies such as Bitcoin, Ether, or Solana. A typical call looks like this: invest in a new coin and bring in more people to increase your yield. However, the project often has no real value, just like traditional pyramid schemes. These scams are usually presented as mining pools, mutual funds, or initial coin offerings or pre-sales (ICOs). A June 2023 report shows that as much as $7.8 billion was channeled into Ponzi or pyramid schemes in 2022 alone, highlighting the scale and frequency of such scams.
Source: cointelegraph
Examples of pyramid schemes with cryptocurrencies
Here are two famous examples of pyramid schemes in the world of cryptocurrencies that can help you better understand how they work:
OneCoin
OneCoin, which operated between 2014 and 2019, has been promoted as a revolutionary cryptocurrency that could become larger than Bitcoin. Investors were promised huge returns, and the project gained popularity, especially in Europe. But in reality, OneCoin was a classic pyramid scheme — profits were based solely on bringing in new members. The project did not add any real value to the world of cryptocurrencies. One of its founders, Ruja Ignatova, also known as the “Queen of Cryptocurrencies,” disappeared in 2017, while her co-founder, Karl Sebastian Greenwood, was sentenced to 20 years in prison in September 2023. years.
Bitconnect
Launched in 2016, Bitconnect promised big profits through an automated bot that was supposed to trade. Investors staked their Bitcoin in exchange for Bitconnect tokens that were used on the platform. However, Bitconnect was another pyramid scheme where “revenues” were paid out from the funds of new investors. The value of the Bitconnect token dropped drastically when the scheme collapsed, leading to huge losses for many investors. The founder, Glenn Arcaro, was sentenced to 38 months in prison in September 2022.
Did you know? In January 2023, investigative journalist Jamie Bartlett, host of The Missing Cryptoqueen podcast, revealed a potential connection between Ruya Ignatova and a luxury penthouse in Kensington, London, reigniting hopes of her arrest.
Source: cointelegraph
Differences Between Legitimate Projects and Pyramid Schemes
The key difference between a legitimate crypto project and a pyramid scheme lies in how it generates revenue. With the right projects, value comes from innovation, quality of service and real contribution to the market. These projects seek to create long-term products and services that have utility and solve specific problems. Pyramid schemes, on the other hand, depend solely on the influx of new investments to survive — without constantly bringing in new members or investments, such systems quickly collapse.
Source: cointelegraph
Warning signs for pyramid schemes
Want to recognize a pyramid scheme before it’s too late? Pay attention to these warning signs:
Promises of high returns: if someone guarantees you huge profits without any explanation of the risks, this is a big warning sign.
Focus on recruitment: if bringing in new members is the main way to make money, it’s probably a pyramid scheme.
Lack of transparency: legitimate crypto projects openly display how they operate. Be careful if you can’t get clear information about how your money will be used.
No real product or service: Pyramid schemes do not offer real value like innovative technology or useful services, but rely solely on the investments of new members.
Source: cointelegraph
How to protect yourself from pyramid schemes?
Now that you know how to recognize the warning signs, here are some ways you can protect yourself:
- Do your research: before investing, study all the details. Who are the founders of the project? Do they have a solid reputation, or are there any warning signs? How long has the project existed? Even a short search can tell you a lot about the credibility of a project.
- Check transparency: legitimate projects clearly explain how they work and where your money goes. Check to see if there is a “whitepaper” that describes the technology behind the project and its plan for generating revenue.
- Avoid recruitment-focused opportunities: if the earnings are mainly based on bringing in new members, rather than the true value of the investment, it is better to stay away from such a project.
- Check the product or service: Make sure that there is a real product or service behind the investment. If they can’t clearly explain to you how the project is making money, it’s a sign that something is wrong.
Source: cointelegraph
What to do if you have been scammed?
If you suspect that you have fallen victim to a pyramid scheme in cryptocurrencies, here’s what you can do:
- Report fraud: Contact your local authorities or financial regulators, such as the Croatian Financial Services Supervisory Agency (HANFA) or the appropriate agency in your country. Reporting helps prevent further fraud and can lead to legal action against fraudsters.
- Seek financial and legal advice: If you have lost money, consult a financial professional or a lawyer who specializes in fraud cases. Refunds can be difficult, but professional help can provide guidance and discover possible options.
- Learn from experience: although it is difficult, this experience can bring you valuable lessons. Educate yourself about pyramid schemes and other scams to help you identify and avoid them in the future.
Pyramid schemes in cryptocurrencies play on people’s desire to make quick profits. Protect yourself by understanding their mode of operation and pay attention to the warning signs. Always do your research, look for transparency, and be wary of investments that are too focused on recruiting. Being informed and cautious are the best ways to avoid scams. We hope that you have learned something in today’s blog, and that you are always careful before investing your money. If you have any questions or suggestions, you can always contact us on our social networks (Twitter, Instagram).
