What are Pyramid schemes?
There are several projects in the crypto market that are offering new opportunities to users to invest their funds. However, not all of them are 100% legitimate. There can be pump & dump schemes, Ponzi schemes and also pyramid schemes.
In this guide, we will discuss what Pyramid schemes are, how to detect these scams and why you should remain far away from them. Before we start, we need to tell you that these schemes are illegal in different countries because they end up negatively affecting investors.
What are Pyramid schemes?
As the name suggests, we are talking of crypto projects with different investment levels. In general, these schemes have the shape of a pyramid, where the first investors are at the top and the last investors are at the bottom.
The pyramid schemes use a business model that works by pushing users to recruit new users that would bring investments and keep the cash flowing into the first users that entered the pyramid scheme. These projects do not tend to re-invest the funds collected, but instead, they completely rely on the investments of new users to keep the business going. Nevertheless, all the pyramid schemes are unsustainable and they will fall sooner or later.
How Does a Pyramid Scheme Work?
The organizer of a pyramid scheme will be searching for early investors that will place their funds in the project. In general, the organizers offer high returns and even larger profits to users that are able to bring new clients.
Those that are at the top of the scheme (those that invested first) may be able to receive some of the funds and profits that were promised. But as soon as second or third-line investors start asking for their funds and withdrawing their money, the pyramid starts falling apart.
In order for a pyramid scheme to be financially successful, it would require an infinite number of individuals that would keep pumping money into the project. However, there is a problem with this, considering there are not enough people on earth to keep doing so indefinitely.
In general, each recruiter should bring two new investors to get his investment boosted or get any profit. In this way, the new two recruiters will try bringing 4 people in total, and these 4 individuals would try convincing 8 investors to place their funds in the project. This goes on until there are no more users to attract, and the pyramid falls.
Bitconnect was one of the largest Pyramid / Ponzi schemes in the cryptocurrency world. This platform was able to gather investments from a large number of investors from all over the globe. The BCC native token to this platform skyrocketed to $500 in 2017 and then plummeted to just $1.
This shows how hard it can be for investors to place their funds in a Pyramid Scheme such as Bitconnect. The platform was offering investors an “investment plan” where users deposited Bitcoin (BTC) and they received Bitconnect Coin (BCC).
After it, they were able to lock their coins and earn interest that was calculated daily. The company claimed they were using a system based on a trading bot that provided users with regular interest.
It is worth mentioning that Bitconnect was working for several years, showing that the first users to invest in this project were actually making profits. However, the last investors that joined this scam in 2017 were mostly affected and lost their investments.
Bitconnect has also been warned many times by authorities from different countries to prove it was solvent. Despite these warnings, it was not possible for the firm to show it was operating legitimately and offering users a reliable source of income.
The founders of the platform have never been captured by law enforcement agencies. However, some individuals connected to this Pyramid scheme have been arrested in India
If you are a crypto investor, you should take into consideration some red flags that would allow you to detect pyramid schemes.
- They promise to give you “financial freedom.”
- Some of them may tell you that you “will not work anymore”
- Rewards are usually high and profits tend to be higher than normal investments
- They ask you to contact more users to get your investment back
- There is no clear product or service offered
- One of the most common pyramid schemes in the market include Multi-Level-Marketing (MLM)