Ponzi, Pyramids, and Cryptos, OH MY!
I’m technology minded. I enjoy reading and learning about it, but when it comes to knowledge of how some technology works, I may as well have been born yesterday. It also seems to me that there are quite a few people that are caught up in a cult style fervour about crypto technology, and most of these people seem to be in it for the quick money. These investors are in it for the smash and grab/pump and dump style of investment with little regard for underlying technology.
As I often feel misinformed about these things, I do my best to research what it all means. A friend of mine has been into investing for some time. He has also made his fair share of money of the rise of crypto mania. We were discussing the merits of Steem. He has been hesitant to get involved because it “sounds like a Ponzi scheme”. As a totally green person in the investing world, I was like…
What even is a Ponzi scheme?
By now, you’ve heard of Ponzi schemes or at least heard the name before. There are much better explanations around than I can give here. Basically, they are a parasitic ecosystem that relies on new investors to pump in money. This new money is them distributed to earlier investors to provide a “profit”. Really, there is no profit and the scam artist who has set up the scheme takes the money and runs. When the new investors stop coming in, the guaranteed profits dry up. Original investors decide to pull out their initial investment. By this time though, the scam artist has already taken all the money and run, leaving them free to drink cocktails on the beach of a non-extradition country until the day they die. This leaves everybody who invested at a loss, with no hope of getting their money back. Pyramid schemes are similar. Yet different
The pointy ends of pyramids
Ever heard of Amway, Herbalife or Scentsy? They are some of the biggest active multi-level marketing businesses in the world. These companies get people to “buy-in”, this money goes to the person that recruits them. That person then gives a portion of that to the person that recruited them, and so on, until you get to the top. Sounds like a certain geometric shape doesn’t it? The recruits then get the priviledge of getting to sell their crappy products and encourage their friends to join, and then their friends and family, and so on...
Both of these systems are predatory in nature and rely on desperate and trusting people to keep them going.
How does this fit into Cryptos?
It wouldn’t take much for a group of computer science majors to set up a crypto and present an ICO. I mean, if you could pay off your university degree in a few months with very little work, wouldn’t you? This Fortune.com article shows that last year there was a ICO failure rate of 59%
Bitcoin.com says the total funding of failed projects from 2017 was $233 million.
You can see that it would be easy to ask for an investment on an ICO/Crypto currency with very little intention to progress it. It makes it especially easy to achieve this off the back of the cryptomania that we saw late in 2017. People with very little interest in the technology and wanting to make a quick buck are happy to put money in on the promises of high returns.
What does this all mean?
There are definitely scams in the crypto space. Most of these scams target people who don’t really know what they are looking at, or talking about. What I hope I’ve shown here is that you need to be careful. Is Steem a Pyramid or Ponzi scheme? I’m told it isn’t. People often talk about it with such hype that it sounds like a shitty Amway product. I’m doing my best to work it all out.
I am very interested in the technology behind these things. I guess time will tell, I mean, I was metaphorically born yesterday when it comes to this stuff. Better to learn to walk before I run a marathon right?