Pyramid Scheme

A pyramid scheme is a fraudulent investment scam that encourages individuals to recruit new investors with promises of unrealistic returns.

What Is a Pyramid Scheme?

A pyramid scheme, also known as a pyramid scam, is a fraudulent strategy in which participants make money by recruiting new participants into the scheme. Essentially, the returns don’t come from selling products or services. Instead, the scam promises substantial rewards to the participants to convince recruits to join the scheme.

The compensation structure of this type of scam often resembles a pyramid. The top of the structure comprises a few original members and progressively widens towards the bottom, with new members recruiting other investors at each level. 

Pyramid Scheme vs Ponzi Scheme

While both Ponzi schemes and Pyramid scams make promises of unrealistic returns while lacking real products and services, they are not the same.  For instance, Ponzi schemes are characterized by a central figure at the top attracting investors while pyramid scams leverage a hierarchical structure, primarily focusing on many participants recruiting others.

The primary difference between the two is that Ponzi schemes pose as legitimate investment management services and promise high, consistent returns on investment. On the other hand, pyramid scams often center around selling a product or service, and are based on network marketing, promising users high, guaranteed returns through the recruitment of new members.

How Do Crypto Pyramid Scams Work?

Here’s how a crypto pyramid scam works:

1. The big pitch or the hook – A fraudulent actor creates a new digital asset or crypto investment opportunity and creates hype around it. The scammer attracts crypto investors with guaranteed substantial returns, like a 50% return on investment.
2. Recruitment – Once you’ve joined the scheme, you are required to enroll new investors. The big idea? The more members you bring in, the more you cash out.
3. Initial compensation – Every new member must make an initial investment before they can join the “lucrative” venture. Your compensation, therefore, comes from the new members you’ve recruited.
4. The bubble grows – The people you recruited are also required to recruit others to get paid. Some participants even reinvest their profits. And as the number of participants grows, so does the scam.
5. The bubble bursts – Over time, the progression becomes unsustainable – since finding new investors becomes difficult – and the money flow dries up. The scheme eventually collapses, leaving a majority of the participants with losses while the scammers disappear with substantial profits.

Crypto pyramid scams operate similarly to traditional ones but lure victims with cryptocurrencies. The fraudulent crypto projects often pose as investment clubs, initial coin offerings (ICOs), or liquidity pools but lack value in the real sense. That is to say, the scheme has no identifiable source of income other than the funds procured from new investors.