Everything there is to know about a Crypto Pyramid Scheme
The cryptocurrency pyramid scheme is one of the most common types of scam in the crypto world. They can grow to a massive size and generate hundreds of millions of dollars from their victims. Victims are lured with big promises of quick wealth, but those who come last are left with their investments gone and no financial returns. So, what is a pyramid scheme? Despite its name, it’s not run exclusively from Egypt. With a cryptocurrency pyramid scheme, the scammers portray to have a legitimate business or investment. But instead of generating profits from the sale of a product or service, the profits are generated by the recruitment of investors who bring in new capital. With the money from new investors flowing upwards, the only people who benefiting are the investors at the top of the pyramid. And that’s the scam. Those at the bottom of the pyramid only get paid by recruiting more participants or investors. When there are no new investors anymore, the pyramid collapses.
Why these schemes are so popular
Simply put, because they work so well. Pyramid schemes existed since ancient times and have been called by different names, yet the concept stayed the same. But when cryptocurrency came into existence, pyramid schemes spread like weeds, becoming harder to spot. This is mainly because of the relatively low bar of entry, and the blockchain allowing instant transactions anywhere in the world. And the relatively new status of cryptocurrency means that otherwise strange of questionable business ventures may now seem profitable and exciting. Cryptocurrency is known for having the rare ability to generate quick returns, prompting people to invest in schemes without doing their due research.
How do Cryptocurrency Pyramid Schemes Work?
Even though Pyramid schemes come in many forms, they all share common traits. The first among these is a focus on recruitment-based profit. The masterminds behind a crypto pyramid scheme have no interest in creating a legitimate product or service to benefit investors and customers. They want money flowing in as quickly as possible. The more people coming to the pyramid scheme and investing or purchasing the scheme’s shiny new but probably worthless crypto coin, the more money flowing up the pyramid to enrich those at the top.
If no real profits are being made, how are people so easily lured to join a cryptocurrency pyramid scheme? Because at the beginning of the scam, those investors who joined early do receive the promised returns on their crypto. The catch: they are being paid with the initial deposits from newer investors. So now we can see the pyramid. The crypto invested by the newest investors is being used to pay those above, giving the illusion that the scheme is working, providing grand and profitable returns.
Key Red Flags in Crypto Pyramid Schemes
- Unrealistic promises: The scammers behind the scheme want their victims in, and they want them in quickly. They promise such things as huge returns on initial investments, maybe 15% returns per month guaranteed. This is unrealistic and a huge red flag. Legitimate businesses can never guarantee returns, however small. Be wary, and if big returns are promised then ask questions. The money has to come from somewhere.
- Recruitment-based profits: An individual participant’s profits are not based on the selling of a product, but rather on commissions received when they recruit a new participant. When the new recruits cease coming there are no new profits and the pyramid collapses.
- Irrelevant or non-existent product or service: As mentioned before, a crypto pyramid scheme doesn’t sell a product or service, but focuses on recruiting members and investors. They may pretend to sell a product to lure investors, but it doesn’t exist, and if it does, it is irrelevant to the pyramid scheme and is not referenced after recruitment.
- The use of jargon: We tend to trust people more if we think they know what they are doing. Pyramid scammers know this and therefore fill their investor pitches with buzzwords and crypto-related jargon such as “smart contracts” and “blockchain rewards.” They do this to try to make themselves seem as legit as possible, but when taking a closer look, their pitch falls apart and truly makes no sense at all.
Examples of Pyramid Schemes
OneCoin;
In 2014, Ruja Ignatova launched the OneCoin cryptocurrency. Initially intended as a competitor to Bitcoin, Ruja Ignatova claimed that OneCoin could be used like any other cryptocurrency; to make payments or hold value. OneCoin was quite succesful, and over $4 billion in capital flowed into the project. However, OneCoin had not been designed for any actual utility. It did not even have its own blockchain. Bound to happen, OneCoin collapsed a few years after its launch, devastating many investors. Ruja Ignatova fled to Europe in 2017 and has not been heard of since.
GainBitcoin;
In 2016, GainBitcoin was introduced as a Bitcoin mining venture guaranteeing 10% returns on investments per month. The scheme was supposed to run for 18 months, with investors lending their BTC to GainBitcoin expecting to receive the promised returns during that time. Even though the company did not engage in any mining operations, or even had any mining equipment, still over $300 million worth of investments flowed into GainBitcoin. Fast forward to 2018, the scheme collapsed and the mastermind behind it, Amit Bhardwaj, was arrested shortly after.
PlusToken;
In 2018, PlusToken was launched as a crypto exchange and wallet, attracting investors with promises of 30% returns on their investments. These returns were supposedly from savvy crypto trades, but in reality, came from newer investors. Over 2 million people participated in the scam, and $2.25 billion flowed into the scheme. Two years after the launch, PlusToken was taken down by the Chinese Government and 109 operators were arrested. The people at the top of the scheme are senteced to over a decade in jail.
Difference between Crypto Pyramid Schemes, Ponzi Schemes, and Legitimate Crypto Ventures
If you have done any research into pyramid schemes, you may have seen this term intermingled with “ponzi” schemes. Often described as the same thing, they are slightly different, so let’s dive into the differences between the two.
Although Ponzi schemes and pyramid schemes are very similar, the main difference is the focus on the scheme. All through history, pyramid schemes have typically focused on recruitment. But Ponzi schemes focus more on paying older investors with funds from newer investors. Ponzi schemes are named after Charles Ponzi, who created a massive pyramid-like scheme in the 1920s that scammed thousands of Americans. So, even though Pyramid schemes and Ponzi schemes are similar, they are two different types of schemes.
So, how can you distinguish a pyramid scheme from a legitimate crypto venture? With due diligence. Pyramid schemes have put a lot of effort into disguising themselves as a legitimate venture, but here are some important differences to know and look for:
- Legitimate crypto businesses should have greater transparency regarding their assets and business models. This will let you conduct proper due diligence on that company, and you can see if they potentially might be a pyramid scheme.
- A legitimate crypto venture will be realistic about business roadmaps and potential returns. They cannot and should not guarantee returns, however small.
- A legitimate crypto business should sell a real product or offer a real service, and not just promise such things.
How to Avoid a Cryptocurrency Pyramid Scheme
There are several steps you can take to minimize the chance you will fall into a cryptocurrency pyramid scheme.
Conduct thorough research. Research the company. Research the founders. Verify any claims they make. Do not simply take whatever the founders of the project say on faith. If they are running a scam, they do not have your best financial interests at heart.
Beware promises of high returns. No business or company can guarantee returns of any kind. They cannot predict the future and cannot say for sure if their products will sell or their value will increase. If you are promised consistently high returns on investments, something shady might be happening. The money they pay does not simply appear. If must come from somewhere.
Have a basic understanding of crypto. Before investing in any crypto-related business or venture, I would recommend having a basic to moderate understanding of how blockchains function and the differences between the different cryptocurrencies. There are many excellent resources for this, no matter your starting skill level. This will equip you to better evaluate any blockchain business and will allow you to cut through the slew of jargon that a pyramid scheme might throw out to make themselves sound legitimate.
Be wary of pressure tactics. Pressure tactics are a key feature of many crypto scams. When under pressure, we can often act without fully thinking through our next step. This can lead to rash decisions. When you are pressured to invest, and hear the “once-in-a-lifetime” remark, I recommend you step bank, reconsider and do some due diligence before participating. That once-in-a-lifetime investment opportunity might be a once-in-a-lifetime scam.
Conclusion
As stated before, cryptocurrency offers many unique opportunities and some generate quick returns, but most opportunities carry high risks. Vigilance is key to avoid falling for cryptocurrency pyramid schemes. This may seem cynical, but always be skeptical of what people say, especially when it comes to your crypto. Pyramid schemes do seem attractive with their grand promises of high returns, but in the end, they are illegal scams that defraud millions of victims, both blockchain novices and the blockchain savvy. If you have fallen for a cryptocurrency pyramid scheme, your first step should involve contacting law enforcement. Then tell others of your experiences and help to educate them. Your experience could prevent a friend or loved one from falling for a similar scam. Be careful when dealing with crypto. Your critical thinking is the best defence against these schemes, but even the wisest can fall.
If you are the victim of a crypto scam, please contact us for a free consultation.
