Most individuals who invest in Bitcoin or other cryptocurrencies - or decide to invest in Initial Coin Offerings (ICO) programs - are often concerned with two issues. The first is Return on Investment (ROI) which represents the amount of profit they can earn from the initial investment. Then the second issue is the possible risk ratio when making that investment. When the risk ratio is too high, investors may lose part or all of their investment, then the ROI index will have a negative value.
In essence, any investment carries a certain rate of risk. However, this rate for investments in illegal Ponzi or Pyramid schemes is much higher than expected. Therefore, learning about the nature and how this model works is extremely important.
What is a Ponzi scheme?
Ponzi model - named after Charles Ponzi - an Italian fraudster living in North America who became very famous after coming up with this asset mining scam model. In the early 1920s, Ponzi's model, which existed for more than a year, fraudulently appropriated the assets of hundreds of victims. Essentially, a Ponzi scheme is a form of investment fraud that works by taking money from latecomers to pay earliercomers. The bottom line is that those who come last usually don't get a dime.
A Ponzi scheme will typically work in the following way:
There will be the first initiator member to advertise the investment opportunity in which participants must contribute $1000. This person is promised to receive back the entire initial investment along with 10% profit after a certain investment cycle (for example, 90 days).
Suppose this investor calls for 2 more investors to participate before the 90-day period ends. Then the initiator will deduct $1100 from the $2000 collected from the 2nd and 3rd person to return to the first person. At that time, the first investor will be attracted and more likely to reinvest with the initial $1000.
By taking money from new investors, scammers will have enough financial capacity to pay early investors and convince them to reinvest while calling for many others to join.
As the system has developed, the initiator is required to look for new investors to join the model in order to maintain the ability to pay promised interest.
When the system eventually reaches a point where it can no longer be maintained, the initiator will either be arrested or will disappear with the money collected from the investors.
What is a pyramid model?
A pyramid model (or Pyramid scam) is a business model in which members are promised profits or rewards by joining the model and making referrals. new people join.
For example, a (fraudulent) initiator presents Alice and Bob with an opportunity to acquire distribution rights in a company for $1000 each. They will then have the right to resell these distribution rights themselves and earn commissions when they introduce new members. The $1000 they earn from each sale of distribution rights will be split 50/50 between them and the promoter.
In the above example, Alice and Bob each need to sell the distribution rights twice to recoup their initial investment, since each time they will get back $500. At that time, the burden of having to resell the other two distribution rights to recoup the initial capital will be transferred to their customers. This model will eventually collapse because more and more people will have to participate in the process. Unsustainable development is the main reason why this model is illegal.
Most pyramid models do not provide any products or services, but only rely on the money earned from accepting new people. However, there are some pyramid schemes introduced as 'multi-level marketing' (MLM) companies that sell products and services legally. This is just a way to hide the inherently fraudulent nature of this model. So, although there are many problematic MLM companies that use pyramid schemes, not all MLM companies are scams.
Ponzi vs Pyramid
Common point
Both of these models are a form of fraud that convinces victims to invest by promising very high profits.
Both require a constant flow of cash from new investors to stay afloat and succeed.
Usually they do not provide any products or services.
Distinctive
Ponzi schemes are often presented as investment management services in which participants believe that the profits they receive are the result of legitimate investments. A scammer essentially steals money from one person to pay another.
The pyramid model is based on a network marketing platform and requires participants to recruit new people into the system to earn money. From there, each member will receive a commission before all remaining funds are gradually transferred to the top of the pyramid.
Protect yourself!
Always ask questions. Any investment opportunity that promises high and quick profits with a small initial investment is a sign of dishonesty. This is especially true for problems that are less common or difficult to grasp. Incredible opportunities, often unbelievable!
Be careful of opportunities falling from the sky. Always be cautious, especially when it comes to invitations to long-term investment opportunities.
You must carefully investigate the seller. The reality of promoting investment opportunities needs to be thoroughly researched. A reputable financial advisor, broker, or stock brokerage company will be registered and regulated by legal organizations.
Don't rely on belief, rely on authenticity. Legitimate investments need to be registered legally. The first thing that needs to be done is to request business registration information. If this investment opportunity is not registered, there needs to be a reasonable explanation and evidence for that.
Understand clearly the nature of the investment. Never invest in what you do not understand. Must utilize all possible resources and be cautious with “secret” investments.
Denounce. When you discover someone being lured into participating in a Ponzi scheme, you need to immediately report it to the competent authorities to protect investors from this form of fraud.
Is Bitcoin a pyramid scheme?
Some people think that Bitcoin is a giant pyramid scheme, which is simply wrong. Bitcoin is essentially just money, a distributed digital currency secured by algorithms and encryption that many people use to buy goods and services. Just like paper money, cryptocurrencies are also used in pyramid schemes (or other illegal activities), but that does not mean that cryptocurrencies or paper money become pyramid schemes. tower okay.