The need for money is common to humankind. This is because money serves several functions - as a medium of exchange, a store of value, a unit of account, and/or a standard of deferred payment. All four use cases may not apply for every human but maybe one or more. Human need money to pay for shelter, food, clothing, healthcare, education, all the things that make your life comfortable. People demand for money for precautionary reasons, that is, in case of emergencies and/or for speculative safety, that is, to cushion when investments drop in value. In all, we all need money.
While everyone needs money, they differ one from another in ways we make money differ and this is defined by our beliefs, values, character. Some are willing to work out (hard or soft) to make money the legit way, other would not mind getting fraudulent or manipulating others to make money. Knowing this is crucial as we go out on daily basis to make money, so we do not fail a victim of the actors who would want to make money at our expense.
Due to the increasing expenditure sources, many have resorted to making money in ways that promise high dividend and that in a quick return cycle. Ponzi schemes and pyramid schemes are such investment options that provide for some quick and high returns, but then, have left many with scars. This post seeks to differentiate between the two schemes, highlighting red flags in investment opportunities that is either a Ponzi or pyramid scheme.
Ponzi Scheme Explained
Ponzi scheme, named after Charles Ponzi, who gained popularity in the early 20th century for employing this method, is the fraudulent investment program that entices investors with the promise of extremely high profits. In a Ponzi scheme, an individual or organization promises high returns on investments with little or no risk.
Earlier participants or investors in a Ponzi scheme are paid their returns using the (investment) capital of new participants, thus, creating the illusion of profitability.
There is typically no legitimate underpinning commercial activity that yields income for the investors, rather it relies on a constant influx of new investors to sustain payouts or dividends to earlier participants. The collapse of a Ponzi scheme is imminent when the program cannot attract enough new investors to pay returns to existing ones.
Pyramid schemes Explained
A pyramid scheme is a dishonest investment plan that lures investors with the promise of high rewards or commissions for each new recruit or participants brought in. In a pyramid scheme, investors are required to make an initial financial deposit, and then convince others to become part of the scheme. Money flows up the pyramid structure, with each level recruiting more participants below them. Like Ponzi, there is no underpinning commercial activity or investment in products, earnings primarily come from recruitment. Thus, new recruits bring more new recruits who then more new recruits.
At the initial stage, participants frequently receive payments for their profits from later investors, giving the appearance of prosperity, however, as thr pyramid grows and more people are reached, it becomes gets harder to find new investors to join, from thence, it spirals down to a fail.
Pyramid schemes my appear to look like multi-level marketing (MLM), but, it lacks the credence of commissions that come from product and service sales which MLM thrives with. The main emphasis is on recruiting participants without offering real value.
Infiltration Ponzi and Pyramid schemes into Crypto
Ponzi schemers have schemed their way into the cryptocurrency space, and they prey on the attraction of rapid rewards in this developing market. Crypto projects like PlusToken and Bitconnect are examples to learn from. Bitconnect was a lending platform that collapsed in 2018 and PlusToken was a massive hoax that deceived Asian investors out of billions of dollars. There are many more.
Red Flags
Watch out for these red flags to identify a Ponzi or Pyramid scheme that would likely How to recognize
- Very high returns with promises of little or no risk
- No genuine products or services offered
- Low volatility on returns
- Complicated compensation plans that are challenging to comprehend
- Proprietary or secretive strategies
- Lack of liquidity
Remember! due to the inherent volatility of digital assets, there are no assurances in the world of cryptocurrencies yet. We have seen a lot of stablecoins fall as well. Hence, there is need for carefulness on investment that promises huge profits.
Final Thoughts
Recently, many are trapped in the Ponzi and pyramid scheme snare with the mention of "cryptocurrency or blockchain". An average Joe thinks wherever crypto is mentioned, it is secured, yet they get along with creating :"usernames and passwords" to access their wallets. That is no decentralization and no account ownership. No matter the technology behind an investment opportunity, every investors must clearly understand what they are investing in and how the investment works. Don't get trapped into the web of Ponzi and pyramid scheme either with fiat or cryptocurrency! Always Do Your Own Research (DYOR) before you invest.
Do you have an experience of losing money to Ponzi or pyramid scheme? Want to share so others can learn in the comment section?
If you found the article interesting or helpful, please hit the upvote button, share for visibility to other hive friends to see. More importantly, drop a comment beneath. Thank you!
This post was created via LeoFInance, What is LeoFinance?
LeoFinance is a blockchain-based Web3 community that builds innovative applications on the Hive, BSC, ETH and Polygon blockchains. Our flagship application: LeoFinance.io allows users and creators to engage and share content on the blockchain while earning cryptocurrency rewards.
Let's Connect
Hive: https://leofinance.io/profile/uyobong/blog
Twitter: https://twitter.com/Uyobong3
Discord: uyobong#5966