Pyramid Schemes are horrible vile things that scam people out of thousands of dollars with the promise of riches. Now more than ever it is important to know what these schemes are, and how to identify them so that you can avoid the trap. With the advent of cryptocurrencies and decentralised platforms it is more important than ever to be informed and knowledgable about these kinds of scams.
How are cryptocurrencies and pyramid schemes connected? Well crypto is complex, confusing and you can often see crazy returns on your investments, and is largely unregulated by governments making it an ideal place for pyramid schemes to operate. So its good to know what they are so you can avoid falling into their traps.
What is it
The Fraud
Things fall apart eventually when there aren’t enough new people left to recruit. People are tricked into thinking that if they give money they will make more back, but no wealth has been created, no product sold or service rendered and no investments made. Its fraud because the system cannot sustain itself and somewhere along the way people are going to loose money. Its estimated that 90% of the people that get involved in these schemes will lose their money. This kind of fraud is illegal in most countries and can see you serving jail time.
These schemes are often disguised to trick you into investing. They frequently take the form of an “investment club” cough BitConnect cough where you have to make an investment to join and then are given incentives such as larger returns on you investment the more people you recruit into joining. Sometimes its disguised as a multi-level-marketing (MLM) company which is similar but legal.
Multi-Level-Marketing - The Legal Pyramid
So what’s an MLM? An MLM is a legitimate business where you move product by building a sales network. Like a pyramid scheme you recruit new distributors below you however the key difference is you make your money from selling the company’s products to the general public, and you earn a commission from the sales of the people you recruited. If they were selling to their recruits then its not an MLM and likely a pyramid scheme.
The Tell Tale Warning Signs
Some of the warning signs as laid out by the Securities and Exchange Commission (SEC) that it might be a pyramid scheme include:
- A promise of high returns in a short time period
- No genuine product or service being sold
- Primary emphasis is on recruiting
BitConnect
Why are we talking about BitConnect? Consider this a case study. Its a perfect example of a pyramid scheme out there now using crypto as its vessel. Many people invested in the scheme and lost a lot of money. It was difficult to initially spot as the lending platform was wrapped into the bit connect platform in such a way they it was presented as just one of the things they did. It seemed more benign. Also with their lending scheme (being online) didn’t exhibit the aggressive tactics classically used by recruiters. None the less the scheme was a classic pyramid and offered very high returns for your investment.
Lets see for ourselves, now on the stock market you would see returns on your investment in the form of quarterly dividends.. sometimes annual. That number can run between 1 and 12% though 12% is considered very very high and is a sign of an unstable company and thus considered risky. Now compare that to the table below where you can see bit connect offering 40% per month returns! They claimed a special algorithm “volatility software” they had created this return through all the transactions on the exchange or some bullshit. But it was easy to swallow bullshit (it very nearly got me!).
That was warning sign number one. Then the next and most glaring sign which should have had you running for the hills was the affiliate program. Have a look at the screenshot from their webpage and see if you can spot the alarm bells in the text:
If you spotted the giant pyramid shape in the middle of the page then well done, but that’s not all. As the text says, the more people you recruit the higher rewards you shall get. Then at the bottom of the page they encourage you to sign of friends and family. This is often how they hook you as its much easier to recruit friends and family. You get a small taste of success and carry on convinced.
As you can see from these tables on their own website the warning signs as laid out by the SEC are right there.
Hopefully after reading this you know a little more about pyramid schemes and how to recognise them, and if anyone ever tries to sell you one of these scams, the quickest way to expose them for wha they are is to ask questions about the business. Good luck out there!
@mrjarvis