What is a Ponzi Scheme?
A Ponzi scheme is a type of scam where grifters deceive investors using malicious and non-transparent techniques. This is a sort of investment opportunity, where scammers keep inviting new investors to put money into a project.
However, at the base, there is no proper investment plan or trading strategy instead scammers continue to pocket money from new investors and use it to repay the old investors. However, this method is usually not sustainable in the long-term and eventually collapses leaving the current investors with losses.
Scammers often utilize deceptive practices to mislead investors about the legitimacy of investment methods. In some instances, the investors may be lured in on account of authority bias.
Scammers can also apply the same method on cryptocurrency projects such as PlusToken. It was a hoax project that looted billions of dollars from Asian investors using a Ponzi scheme. Lack of transparency, vague strategies, and lack of honest disclosure are some of the important signs of a Ponzi scheme.
What is a Pyramid Scheme?
A pyramid scheme is a type of investing scam that continues to recruit more salespersons to push a given product to a bigger audience. This type of scam does not have a qualified strategy or track record that generates profits based on the sales of a given product. Instead, the hierarchical structure of this fund continues to add more investors at a smaller scale and asks them to generate profit by marketing and selling the main product.
In this manner, the sellers are able to generate profits by letting new sellers purchase the product while the responsibility of selling the given product in a profitable manner lies with the newly introduced investors.
Much like Ponzi schemes, this type of investing model is also bound to collapse eventually. However, in this case, the most recent investors tend to be the ones who have to sustain losses. On this account, pyramid schemes are banned in various countries.
Pyramid schemes are often based on a multi-level-marketing (MLM) model. Another important sign of a brewing pyramid scheme is that it does not offer any authentic products or services and operates by the way of adding new recruits to the project.
Ponzi Schemes Vs Pyramid Schemes
Primary Goals
The primary goal of a pyramid scheme is to recruit as many new merchants or participants as possible. On the other hand, the main focus of a Ponzi scam is to find new investors on a continuous basis.
Design
Ponzi schemes usually have a centralized structure and models their hierarchical system based on this system. Meanwhile, pyramid schemes tend to use the same hierarchical method to recruit new sellers who have to purchase a given stock of the available goods before they are able to sell them.
In some cases, the new recruits may be lured in with a promise to earn commission on sales and have to complete their sales target before a given timeline. However, when the timeline is crossed, the ambiguous contract requires them to purchase the unsold goods or services.
Source of Profits
The investors who are participating in a Ponzi scheme do not get any information about the structure, goals, and strategies of the project. Instead, the scammers who are running this type of scheme often repay the old investors with the money that have hogged from the new investors.
At the same time, the scammers continue to pocket money and satisfy investors with manipulated financial reports.
On the other side, pyramid schemes allow the sellers at one level to earn profits by selling their products to a lower level. In this manner, there are various tiers of investors who have a given quote of services or goods that they have to sell in order to make profits. However, the sellers often divide the product among new merchants rather than offering them directly to end users.
Incentives
Ponzi schemes often promise unrealistically high returns on investment while pyramid schemes encourage new sellers to join with the promise of exponential growth and returns.
Sustainability
Both Ponzi and Pyramid schemes have an unsustainable structure that is bound to go bust sooner or later.
Conclusion
Financial scams have been around since the beginning of time. Therefore, cryptocurrency investors can protect themselves from considerable losses by learning about signs of commonplace scams such as Ponzi and Pyramid schemes.
