Pyramid and Ponzi schemes: how not to get lost in the world of cryptocurrency

Most people that invest in or any other crypt, or those who choose to participate in ICO are usually worried about two things. First, it is return on investment (ROI), i.e. the profit that they will receive in the end of the initial investment. Secondly, it is the risk associated with investing. When the risk is too high, investors may lose their investments (partially or completely), which will lead to a negative ROI.

Of Course, there will always be some risk associated with the investment. However, the risk is greatly increased in those cases when an investor unexpectedly involved in Ponzi schemes or pyramids, which is illegal. Such schemes need to identify and understand how they work.

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What is a Ponzi scheme?

A Ponzi Scheme is named after Charles Ponzi, an Italian con man, who moved to North America and became famous for its fraudulent system of extortion of money. In the early 1920-ies, Ponzi was able to defraud hundreds of victims, and his scheme worked for more than a year. In essence a Ponzi scheme is a fraudulent investment Scam, when older investors are paid with money collected from new investors. The problem of this scheme is that the last investors will not receive anything at all.

The Ponzi Scheme will look like.

The One who advertises the opportunity to invest, the investor takes $ 1,000. He promises to pay the initial fee and the 10% surcharge at the end of a certain period (e.g. 90 days).

It can attract additional investors to complete the 90-day period. Then he will pay $ 1,100 the first investor from 2000 collected from the second and third investors. He then, of course, will offer the first investor to invest $ 1,000.

Taking money from new investors, the fraudster may promise to pay additional profit to the first investors, urging them to re-invest and invite more people.

The growth of the system, the fraudster needs to find new investors who join the scheme, otherwise he will not be able to pay promised benefits.

Eventually the scheme becomes unstable and the scammer disappears with the money on hand.

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What is a pyramid scheme?

Pyramid, or a pyramid scheme works in the business segment as a model that promises payment or reward to members who not only join the scheme, but also try to invite new members.

For example, the scammer invites Alice and Bob to purchase the distributorship in the company for $ 1,000 each. So now they will be able to sell distribution services, receiving a share from each additional member they managed to invite. $ 1,000 collected from their own sales distributors, then share with promoter 50 to 50.

In this scenario, Alice and Bob need to sell two ticket distribution to recoup the investment because they receive $ 500 from the sale. Then the task of selling two tickets for the reimbursement of the initial investment is passed on to their customers. The scheme eventually falling apart, because to continue you need to process more and more participants. Unstable development of the scheme makes financial pyramids are illegal.

Most of the pyramids do not offer any product or services and are supported entirely by money received from the recruitment of new members. However, some of the pyramid can be presented as a legitimate multi-level marketing company (MLM) that intend to sell services or products. Usually they do this only to hide the main fraudulent activity. Therefore, a MLM-company with questionable ethics use models of the pyramids, but not all MLM companies are cheating.

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a Ponzi Scheme or pyramid: similarities

Both the schema — form of financial fraud that convinces victims to invest by promising a good profit.
Both require regular influx of money of new investors to be successful and stay active.
Typically, these schemes do not offer real products or services.

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Distinctions

Ponzi Schemes are typically exposed as services, investment management, when participants believe that the income they receive is the result of a legitimate investment. The scammer usually takes from one to give to another.
The pyramid is based on network marketing and require participants to invite new members to earn money. Therefore, each participant must pay a fee to send money on the top of the pyramid.

How to protect yourself

Be skeptical. Investment opportunity that promises quick or high returns with minimal investment is likely to be unfair. This is especially true when you are investing in something completely unknown or incomprehensible. If the promises are too good to be true, most likely it will.

do Not look for freebies. an Unexpected invitation to take part in long — term investing is usually a sign of a Scam.

Study the possibility. you Need to investigate the organization that manages the invested funds. A reliable financial Advisor, broker or company, most likely, will be registered and monitored by the relevant authorities.

don't trust — verify. Legitimate investment must be registered according to the law. The first thing to do is to inquire about registration. Ifinvestment opportunity is not registered, you should wait for a reasonable explanation.

Ensure that you are good in investing. Never invest money in something that is not understand to the end. Be sure to use the resources available and be careful with investments, are shrouded in mystery.

Complain. If you see a pyramid or a Ponzi scheme, it is important to inform the relevant authorities. This will help to protect future investors.

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Bitcoin pyramid?

Some believe that Bitcoin is a big pyramid scheme, but that's complete nonsense. Bitcoin is just money. Is a decentralized digital currency that is protected mathematical algorithms and cryptography and can be used to purchase goods and services. As with conventional money, cryptocurrency can be used to create the pyramids, or other questionable schemes, but this does not mean that the crypt or plain money — pyramid.