The history of the concept of “financial pyramid” begins from the time when distrust in banks appeared. Having studied the banking sector, it became clear how money is made out of thin air. To do this, it was only necessary to create a constant flow of funds in the system, which would further redistribute funds between participants, giving everyone the opportunity to earn money. Owners have the right to use other people's money, and investors benefit in the form of profits.
It seems that everything is beautiful and simple - and partly it is. We conducted extensive research and tried to answer frequently asked questions. Therefore, it makes sense to talk further about what are the signs of a financial pyramid, what it is, its types and how it works.
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What is a financial pyramid
is an organization whose profit is generated by the constant influx of new funds in the absence of any real activity or product. In short, this is a fraudulent organization that offers to place investments under "Draconian" percentage of profits, guaranteeing quick earnings. The company does not produce a product or service, but provides profit to early participants at the expense of late ones. Thus, there is a banal transfer of money from one hand to another. We recommend watching an excellent documentary that examines this definition.
However, under such conditions it is impossible to work forever, which provokes a sad outcome of events for everyone - the cessation of payments. When the outflow of funds exceeds the inflow, the organizers of financial pyramids close the project. Therefore, these types of schemes are generally considered fraudulent, despite the fact that at times such “companies” receive incredibly large sums. The most famous and once reliable investment company in Russia in the 90s, which in fact turned out to be fraudulent, is the financial pyramid “MMM” by Sergei Mavrodi. The film talks about this, but we will look at this in detail later.
History of financial pyramids
"Tulip Fever"
The first and also the largest financial pyramid in history, rightfully deserving of its title, is the Dutch “tulip fever”, which spread in the 17th century. The excitement was excessive. “Tulip exchanges” were even created, where entire fortunes were earned through speculation. One bulb of a unique variety could easily be exchanged for an expensive house. The market collapsed in 1637, but even to this day nothing has recreated a rush of this magnitude for an unbacked resource.
"Mississippi Company"
The tulip fever was not essentially a pyramid scheme, because there was no need to attract new money. The first financial pyramid was created by John Law, forming an open joint-stock company called the Mississippi Company. The company attracted new contributions from shareholders, which were to be used to colonize French territories located on the Mississippi River. At the same time, the shares were not distributed among a narrow circle of people, but everyone could purchase them. The success was incredible and the shares increased their value many times over. Over time, the stock price collapsed, making payments to millions of investors impossible.
The definition itself, as a term, was first used by the British in the 1970s to refer to cheating. However, history shows that the first modern financial pyramid was created by Charles Ponzi in the USA. Ponzi recreated the first single-level scam
, based on attracting new deposits. Charles founded a company that offered to buy coupons in exchange for a promissory note that guaranteed 50% of the net profit after 45 days. Over time, it turned out that there were only 27 thousand coupons on hand, although 160 million were supposed to be in circulation. The scam was exposed, and investors returned only 37%. In total, Charles raised $50 million.
"MMM"
The incredible boom of financial pyramids in Russia occurred during the period of large-scale privatization in the early 1990s. At the same time, the largest financial pyramid in the CIS region was created under the leadership of Sergei Mavrodi “MMM”. The company was engaged in the issue of shares, which were offered for purchase to everyone. As a result, the organization was recognized as the largest scam, although it officially paid taxes. Let's take a closer look below.
How a financial pyramid works
No monetary structure can function without a constant flow of money, so the principle of such work can be associated with pyramids. After all, in fact, if you withdraw all deposits from any bank, it will close. Why? – because the bank does not produce any product, but in defense of banks it is worth mentioning the provision of financial services. The principle of operation of a financial pyramid is based on an exceptional influx of new investors. As soon as the influx stops, the investment site is closed.
To understand how to build a logical chain of events that helps to understand how a financial pyramid works, let’s give a clear example:
- Let's say a legal company has opened "Naduvalovo" .
- The fund attracts investments, guaranteeing earnings of 1% daily.
- The first investors appear and are paid the stated return.
- Investors like everything, so they express a desire to attract new partners, because "Naduvalovo" will give 10% of new deposits.
- The project also pays this money, so more and more people want to earn money.
- "Naduvalovo" is developing, and the first investors are already receiving net profit on personal deposits. All investors rejoice and sing songs of praise.
- There comes a point when the payment obligations become too large, or the organizers simply want to close the program.
- Payments stop.
- Investors understand that this is a fraudulent scheme, but alas, even the police are unlikely to find the creators "Naduvalova" .
In short, the whole process goes something like this. Almost everywhere they write that financial pyramids are unprofitable organizations. We agree with the title “scam” that the majority are left with nothing too. But few people talk about how a huge number of people became millionaires by participating in such schemes. The Internet contains a lot of them. You just need to know how to earn money and understand the principle of work, although everyone makes the choice to participate or not.
Signs of a financial pyramid
One of the most frequently asked questions for sure “How to recognize this kind of company?” . A sign was made for this purpose. So, the signs of a financial pyramid include:
| The company's activities are based solely on words | The company's work is supported solely by words or text on the website. No one will ever show what operations are being carried out because they do not exist in nature. |
| No accounting reports | Income on the deposit is accrued according to the stated conditions. Another point is that a highly profitable project will never provide accounting reports on its activities. |
| Interest is higher than bank interest | Each sign is important, but this point is the most revealing. If an investment fund offers a guaranteed income that exceeds the bank interest on deposits, it will probably turn out to be a financial pyramid, of which there are many types. |
| No faces | Often faces are not revealed. On the other hand, their presence does not guarantee the reliability of the company. |
| Documents in an offshore country | Most often, organizations are legal. This happens because documents like the Panama license are not difficult to forge (purchase). Certificates are also forged, which will claim that all money is protected and insured. |
| Barkers give guarantees | There are a large number of activists who are “pumping up” the investment fund. At the same time, such persons often guarantee 100% results and no risks. |
| Fast payback period | The payback period for the investment can be from a month to a year (more unlikely). This exceeds bank deposit conditions many times over. |
| Minimum contribution | A minimum contribution is required to participate. |
| Active PR campaign | There is massive advertising and people come in packs. It is also one of the most important signs. |
| Promises for years to come | It is certainly not known how long such enterprises last, although the average is 1-12 months, with ten-year plans of the organizers. |
| Organizers' persistence | The creators do their best to encourage new investors to make deposits using tricks and tricks. Early investors are also forced to reinvest. |
| Passive income | The main sign is that you don’t need to do anything, just give them money and sit on the couch. Surely such conditions are inherent only in “pyramidos”. |
This is how a financial pyramid functions, the signs of which can be detected with the naked eye.
Financial pyramid - essence and purpose
The main goal of the creators of such a scheme – become richer due to the permanent influx of new participants. Whoever manages to get rich with them is a great fellow and knows that the sphere implies not only losses, but also excellent profits. To understand how financial pyramids work, you need to understand their essence. Everything can be depicted primitively using the following diagram.
The creators are professionals in their field, so they know how to make an investment project where people will spend money. The investor will make a profit until the outflow exceeds the inflow. As soon as everything comes down to this outcome, the financial pyramid collapses, and investors understand that this is the end. Essentially, it all comes down to the redistribution of income between platform participants. It is difficult to dissuade an experienced person from participating in this kind of investment, since he knows that he cannot get that kind of money out of the bank or from his place of work.
Types of financial pyramids
Single-level
The simplest and most popular type is a single-level investment fund. This is a standard Ponzi scheme. It is not necessary to invite new clients, because the creator pays the participants with personal funds at the initial stage of work. After gaining popularity and creating the illusion of a reliable project, the cash register begins to fill with investors’ money. In short, the operating principle is based on the independent development of the platform by the administrator without stimulating the audience to develop.
Multi-level
This type of highly profitable program is similar in principle to the previous one, but requires mandatory invitations. Without partners and additional funds, it will become impossible for funds to flow from late investors to early investors and the admin. Multi-level projects can include up to 15 levels of structure, but fully populated levels will be equal to the number of people in the country.
Matrix
The matrix scheme provides for a type of marketing in which the investor undertakes to fill out his own matrix. The size of the matrix is described by the company's terms and conditions. The new participant ends up at the very bottom of the matrix and gradually moves up, filling out his own. In this case, inviting partners is not necessary, since the matrix can be filled out by superior and subordinate people. It is worth saying that such a situation is unlikely. Schematically it looks like this.
The single-level financial pyramid is the most tenacious, since the cash desk is burdened solely by deposit obligations. The average life expectancy of this species is approximately from 4 months to several years.
The largest financial pyramids in world history
As technology and human skills developed, the ability to obtain benefits progressed in parallel. On these grounds, marketing changed, which attracted more people and money, respectively. This provoked the development of highly profitable investment schemes and new types of financial pyramids appeared. Next, each type is considered separately point by point.
Particularly famous in 1981 was the founder of Trans Continental Airlines Travel Services and a dozen others, Lou Perlman. The companies were listed only by documents and did not conduct any activities. Lu managed to sell shares of his project for 20 years in a row and even place shares on the stock exchange. Both individuals and financial institutions bought shares, and their share prices rose.
The criminal scheme was later discovered and Lou Perlman was sentenced to 25 years in prison. During all this time he managed to attract $300 million. Interestingly, it was this man who created the popular musical groups Backstreet Boys and NSync.
European Royal Club
In 1992, an organization called the European Royal Club was founded by two partners, Damara Bertges and Hans Spachtholz. The club had great financial influence and was perceived as the opposite of the banks of Europe. Members of the European Royal Club had the right to purchase a "letter", which was presented as a share in the company. The shares gave a yield of 200 Swiss francs at a cost of 1,400 monetary units. The fraudulent scheme was uncovered 2 years later. During this period of time, the amount of investment amounted to 1 billion dollars . Damara was given 7 years in prison, and Hans 5.
The Greatest Pyramid by Barnard Madoff
The largest financial pyramid scheme of all time in the world was created by a man named Bernie Madoff. The activity of the scheme falls on the modern period. Bernard Madoff formed the investment fund “Madoff Investment Securities,” which was rightfully considered one of the most reliable and largest in the United States. The fund gave investors between 12% and 13% returns each year. Over the 15 years of its existence, it was able to attract both investments from individuals and capital from large financial companies. According to estimates, over the entire period it was possible to attract more than 3 million people and capital in the amount of $65 billion! The bubble burst in 2008, and Bernie received a 150-year sentence.
Ingenious schemes
The name of the scheme is derived from the name of the creator from Pakistan with the beautiful name Syed Sibtul Hassan Shah. For some time, Syed Shah lived in the city of Dubai, after which he returned home - the city of Wazirabad. The guy actively began telling his neighbors about his incredible competence in managing capital on the stock exchange.
Only about 10 people believed Shah, who gave the money with guarantees that it would double within a week. The guy fulfilled his obligations and after 1.5 years he managed to collect about 1 billion dollars with more than 300 thousand investors. Shah's activities ceased and as a result he was arrested under the law.
It is also impossible not to mention another interesting historical moment. In 1999, a businessman from China named Wang Feng opened his own company, which invited everyone to become its investors. The essence was an unusual business - buying and caring for “special” ants. The ants cost $1,500 and, according to legend, had healing properties. For 14 months of ant care, investors were entitled to accruals of 32% per year of the purchase amount.
Wang Feng became a very famous person, who was written about in newspapers and talked about on television. However, in practice there was no use of ants. The scam collapsed after reaching a total investment of $2 billion , and Feng was sentenced to death.
Popular financial pyramids in Russia
"MMM"
Russia's largest financial pyramid, MMM, run by Sergei Mavrodi, has already been mentioned several times. Sergei and two henchmen decided to organize an enterprise, the name of which consisted of the first letters of the founders' surnames. The company offered to become a shareholder to everyone who would receive 1000% per annum. The popularity was enormous, especially on television.
The company had an attractive slogan: “Tomorrow is more expensive than today.” The organizers managed to work for 5 years, attracting order $2 billion with millions of investors. In 2003, MMM was recognized as a fraudulent scheme, and the founders were taken into custody. However, Sergei said that the collapse of MMM was solely the fault of the state. According to the law, the company had to pay 11 billion rubles to the state in the form of taxes, while 15 were paid. However, the state turned everything upside down so that the founders were forced to pay 50 billion.
"Vlastilina"
The well-known financial scam “Vlastilina”, registered by Valentina Solovyova, gained considerable popularity in 1992. The company accepted deposits at interest and after the deposit expired, it gave the opportunity to buy a car or a house with a 50% discount.
However, 1995 was the last year for “Vlastelina”. Valentina was arrested without the right to leave prison less than 7 years later. The collapsed network has deprived 16,000 customers $2.6 million .
"Russian House Selenga"
The company "Russian House Selenga" was founded in 1992. It was also one of the first financial pyramids in the CIS. Sergey Gruzinin and Alexander Salomadin opened more than 70 branches throughout the country, offering investors profits from investments in a chain of supermarkets, transport and tourism enterprises. The scam collapsed in 1994, leaving the 2.4 million participants who contributed with nothing. 2.8 trillion non-denominated rubles .
Since 1992, the Khoper-Invest organization has been building a massive network of points for accepting money at interest. The fraudulent scheme developed a number of dubious companies and exported capital abroad from Russia, exchanging it for foreign currency. The bubble burst in 1997, and the founders were given 8 years. Four million people were defrauded out of 3 trillion non-denominated rubles.
State pyramids
We wanted to dig as deep as possible when considering this scheme. From our research it turned out that almost everything in our world works according to the principle of a pyramid. Let's look at real examples.
Banks
A bank is a financial institution that accepts money from interested parties for safekeeping in exchange for their use. Banks have the main product thanks to which these “pyramids” exist - credit. Without it, the existence of these structures would not be possible, since the first main instrument is the deposit. Each investor receives 7-12% per annum, so money is constantly leaving the cash register. Only an increased loan rate gives stability to large banks. But history knows a lot of examples when banks burst like a bubble. Do you know why? – because people withdrew their deposits en masse. The cash register is empty, the bank is closed, does it remind you of anything?)
Everyone was young and would eventually become old. The state takes care of the elderly by providing them with a state pension. However, not many people know where this money comes from. While we are working, we pay tax to the state on every salary we receive. Thus, the young provide for the old
. It is impossible to say that we pay taxes and then we will receive them in old age. The world of finance is changing quickly, currencies rise and fall - too much is changing. Therefore, while young people give away part of their income, the state pays pensions to older people. As soon as this stops, there will be no pension. There is a banal transfer of money.
Dollar
And of course, it is impossible not to mention the great and mighty US dollar. After World War II, the US authorities carried out a competent policy that made the American country the greatest and richest on the planet. But America does not have as many gold and foreign exchange reserves as dollars that have been issued around the world. According to statistics, only 4% of the total currency is backed by gold. Conclusion: the dollar is a global financial pyramid, which is supported solely by fictitious interests, because the US national debt is $21 trillion.
Famous financial pyramids on the Internet
Fraudulent schemes are recognized to be called. These schemes have all the hallmarks of financial pyramids, so next we will consider the most famous ones.
The Mercury network pyramid appeared at the beginning of 2014. The project was picked up and began to develop. Investors were offered 1% profit every day for a year. The money was placed without guarantees on a voluntary basis, but there were many who wanted to become investors. The hype closed that same year.
Another well-known financial pyramid of our time is Webtransfer. The investment conditions were pleasant and gave participants 0.5-3% profit daily. The company was engaged in microcredit, where anyone could become a lender or borrower. The popularity was extremely high and many were able to become millionaires, but the bubble burst.
Questra World
Questra Worrld, Atlantic Global Asset Management, AGAM called this hype all over again. It has become extremely popular throughout Europe with huge accumulated liquidity. It was proposed to buy investment portfolios that gave from 17% to 26% profit monthly. Thousands were able to get fabulously rich and earn tens of thousands of dollars, since the hype was worthy, but it still closed.
MVK – Millionaires in Sneakers – became a popular platform in 2016. The fund was managed by Vladimir Romanov and gave investors a floating percentage (average 1%). People invested fabulous amounts of money, even sold property. Many got rich, but most lost.
The Bitcoin investment network pyramid Airbitclub has become popular amid the growth of Bitcoin. For marketing, participants received 40% per annum. It was popular on the Internet, but few people made money.
Cashbury
The largest investment project in the CIS in 2017-2018 is Cashbury. Specializes in microcredit. Hundreds of offices were opened throughout Russia, large-scale leadership trainings and massive advertising were carried out. Hype gave up to 1% daily for 400 days. Thousands of people got rich.
The legendary hype DDfutures, whose admin decided to wipe the nose of the entire industry, giving 2.1% of net profit per day from the end of 2016 to 2018. The fund became popular on the MMGP forum, was able to give over 1100% of net profit and turn over more than 1 million dollars over the entire period.
Responsibility for the creation of financial pyramids
All states are fighting against financial pyramids, because they directly affect the well-being of the country. The founders are literally depriving the country of funds, since naturally no one pays taxes. All structures that have signs of a financial pyramid are prohibited in Russia under Article 172.2 of the Criminal Code of the Russian Federation and bear criminal liability.
According to the law, for creating fraudulent schemes in China and the United Arab Emirates, a severe penalty is provided - the death penalty. If a country does not have a separate article on this matter, fraud may be considered illegal business.
Difference between network marketing and pyramid scheme
Often people cannot understand how network marketing differs from a financial pyramid. Many people believe that they are the same thing - this is a very misconception. Beginners assign similar meaning to both definitions, since the principle is quite similar, and they earn money in a similar way. Conclusion - it's all a scam. The following table lists the main differences between network business and ponzi projects.
Modern operating financial pyramids
Now you know what a financial pyramid is and what its signs are. Almost all sources draw an unequivocal conclusion - it is impossible to make money on investment projects of this kind. It may sound a little rude, but these people are absolutely incompetent on the topic. This article contains a lot of examples from history where people lost a lot of money, but experienced participants made colossal profits. Without exaggeration, many became millionaires without breaking the law. Participation is not illegal.
This type of income is the main one for us, because the area has been studied inside and out. If you follow all the rules, you can earn money, and even very stably, at least read the reviews of the MMGP forum participants. We do not encourage anyone to invest money in banks or such projects - everyone makes their own decision. If the topic is really interesting to you, you can look at those who are paying at the moment. It is constantly updated, and the blog monitors work in real time. Investing in cryptocurrency, knowledge or keeping money under your pillow is everyone’s choice, but we are personally encouraged by this thought from a wise, successful person:
“Either you control your money, or the lack of it will control you.” Dave Ramsey
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How financial pyramids work and who makes money from them
What kind of financial pyramids are they?
Financial pyramids are a dangerous and illegal way to invest money. Although the first pyramids appeared at the beginning of the last century, they have survived in different forms to this day. In 2017, almost all classic pyramid schemes moved to the Internet.
Pyramids operate under a fraudulent scheme. You make a contribution to the pyramid - your money is distributed among other participants. To earn money yourself, you need to attract new investors. Your profit will come from their money. The more new members you invite, the more you earn.
The pyramid and your profit grows while new participants join the system. As soon as the list of new investors stops being replenished, the financial pyramid will collapse - and you will lose money.
Fact: you can make money on the Internet. Many. As much as you like, depending on your abilities and aspirations. Here are your options
List of popular financial pyramids in 2017:
- Classic pyramids like MMM, where money is transferred from one participant to another.
- False investors who offer intermediary for trading on the Forex market. Typically, such companies pretend to be traders, but they themselves act according to the classic scheme: they collect money from some investors and give it to others.
- Disguised pyramids that pretend to be network marketing: they sell dubious dietary supplements, cosmetics and sports bracelets. A similar scheme works here: the more new sellers you bring, the more you earn. Personal selling doesn't matter.
Is the activity of pyramid schemes on the Internet legal?
Differently. In Russia there is no ban on companies similar to Internet pyramids. The law prohibits only projects that do not conduct official investment activities and pay all profits to investors at the expense of new participants.
Therefore, sometimes pyramid schemes disguise themselves as legitimate network marketing (MLM) companies. In such companies the same scheme works as in ordinary pyramids. Only here you don’t just invest money in a pyramid, but buy some cheap junk for resale.
In fact, there is no need to look for buyers. Unlike honest MLM companies, pyramids don’t care about your sales. Products are a cover: no one needs magic bracelets and miracle devices. You receive the main reward for attracting new sellers.
It’s hard to find fault with “legal pyramids”: they pay taxes, they have goods and buyers. Only classic pyramids are prohibited, the entire income of which depends on attracting new participants, and not on the sale of products.
In 2016, the State Duma adopted a law according to which the creators and participants of such pyramids can be fined. For creating and advertising a pyramid, individuals will pay a fine of 5 to 50 thousand rubles, and legal entities - from 500 thousand to a million. It turns out that even if you just share a picture of MMM on Facebook, you can be fined by law for advertising a pyramid scheme on the Internet.
Who makes money in online pyramids?
But don't expect to get rich. Remember that any pyramid will eventually fall apart. Even if you remain in the black, you will steal money from other, less fortunate participants in this network. Pyramids are based on those who came last and did not manage to collect the money in time.
Since this site is dedicated to working on the Internet and ways to make money online, I think that it is simply necessary to pay some attention to financial pyramids, since this phenomenon is also a kind of “type of earnings.”
Many people confuse the concepts of financial pyramid and network marketing into one, mistaking one for the other, since the structures are very similar.
A little theory: a company that has distributors, as well as the presence of any physical product for distribution (sale) - this company belongs to network marketing (MLM company). If the company does not have any product, and the remuneration for old participants is formed by “injecting” money with new ones, this is a financial pyramid.
I have been making money online for a relatively long time, but over these few years I have never taken part in financial pyramids, and there are several reasons for this...
Why should you not take part in financial pyramids?
Firstly, I have never heard of anyone actually earning any normal amounts in a pyramid scheme. Although no, I have heard of it. However, those who talked about this themselves are barkers, which means that by definition there can be no faith in them.
Secondly, not all of these structures are reliable. There is no guarantee of receiving the money earned, but there are obviously great chances of getting into a scam.
Thirdly, this type of income in itself is somehow unpleasant. You sit and think about how to invite people to invest their money. After all, this is the only way you can, if not earn money, then at least return what you invested. Moreover, you cannot guarantee a person with confidence that the project will not deceive him in the future.
Based on what was written above, the following is obvious - I will not offer you to join some kind of financial pyramid. In this article, I want, to the best of my modest ability, to talk about what I know about financial pyramids and is it even possible to make money in them?
The structure (essence) of any financial pyramid is inviting new participants. That is, in order to earn money, as a rule, you first have to deposit some amount, and then you need to invite participants under you. They, in turn, also invite participants and you should make good money.
Other pyramids shout that in their company you can earn a million by investing 100 rubles. Yes, this is possible, but there is one caveat. Do you have a way to embrace a bunch of people? Do you know him? And not only invite, but convince people to make the required down payment. Is this real? My opinion is that yes, this is real, but there are only one or two such smart people out of a million. As a result, the creator of this financial pyramid and two smart guys earn the million promised rubles. The majority of participants are left with nothing. At best, you can earn a small amount of money, and not everyone can do that.
Recently, financial pyramids have been active online. Now there are a lot of them on the Internet. Their creators are coming up with new ways of disguise so that a person cannot understand that he has ended up in a pyramid. They call themselves online games with real money withdrawal, where you need to plant and grow trees or, for example, buy animals, raise them and then sell them, mutual aid cash desks, money tables, and so on. But the essence is the same - at the first stage you invest a certain amount of money, and at the second - inviting new participants.
I strongly advise against taking part in any projects in this area. Only those who know how and where to find that layer of society that is prone to short-sightedness, stupidity, greed and laziness can make good money there. After all, for the most part, only such people enter financial pyramids.
If you still decide to try to take part in pyramids, even despite what is written above, then pay attention to the site itself, what it looks like. The higher quality and volume it has, the more likely it is that the project is honest (well, if this way of making money can even be called honest). You need to look for reviews about this company. But keep in mind that almost all financial pyramids buy positive reviews. However, for the sake of interest, it’s still worth reading what they write there.
The size of the down payment also plays a significant role here. It would be wiser to get involved in a pyramid where the deposit is 100 rubles, rather than one where the investment is $100. After all, there is a high probability that you will never see the invested funds again. It is also very important what stage of development the project is at. As a rule, the lifespan of a financial pyramid is no more than a year, and in most cases much less. Therefore, if you still don’t have one and want to participate, then it is better to join as early as possible, in the first stages, before the project is saturated with participants. The more participants, the closer the collapse of the financial pyramid is, and this has been indisputably proven.
I briefly outlined all my thoughts about financial pyramids here. You can make money in such a business. This is truly a huge business on the Internet. I hope this is so only for the time being... If you want to try, go for it, just don’t forget that the organizer and, if you’re lucky, the first 100–200 participants earn normal money, provided they show unprecedented activity. The rest are left with nothing.
Is Bitcoin a pyramid scheme? What do cryptocurrency and big money scams have in common? We decided to look into this issue and tell you about the largest financial frauds of the last century.
As you already know, just the other day. The main arguments of this analogy can be expressed in quotes from the director of the national payment system department of the Bank of Russia, Timur Batyrev, and his deputy, Andrei Shamraev:
The analogy between Bitcoin and pyramids is quite obvious due to the speculative nature of transactions with it. There will be people who will be ready to part with money in the hope of easy profit or who are ready to influence the Bitcoin rate in order to obtain maximum profit. But there will also be people who will pay for this profit. Bitcoin is only backed by the time spent “mining” it, unlike securities, stocks or bonds.
So what is a financial pyramid?
A financial pyramid is an organization that ensures its income and the income of investors by constantly attracting funds. The first investors of the pyramid receive income from the deposits of new participants, and those from the deposits of subsequent participants, and so on until its complete collapse. As a rule, the true source of income of the organization is hidden or is false. As soon as the pyramid is deprived of new financial contributions, it collapses.
Is Bitcoin a pyramid scheme?
The financial pyramid promises high returns, which cannot be maintained for a long time and repayment of obligations to investors is obviously impossible. Nobody promises high profits to Bitcoin holders; cryptocurrency is essentially a convenient way to store your money and pay with it for various goods and services. Behind bitcoins is a real product with software and special properties (anonymity, low transaction costs, decentralization, lack of inflation), which ensure its value. A typical pyramid is not a product of any kind.
To better understand financial pyramids and understand whether Bitcoin has anything in common with them, we invite you to get acquainted with the largest and most destructive money scams of the last century. So, let's get started.
1. Ponzi scheme
One of the very first and most famous pyramids belongs to the Italian swindler Charles Ponzi, who in 1919 came up with a get-rich-quick business scheme. One day he received a letter with an international exchange coupon enclosed inside, which anyone could exchange for stamps and send a reply letter back. The most interesting thing was that in Europe you could get only one stamp for such a coupon, while in the USA you could get as many as six stamps for it.
After this, Charles created the company “SXC”, invited investors and began offering people to make money on simple arbitrage, i.e. buying and selling goods in different countries. To those who invested in his papers, Ponzi promised 150% of the invested amount in 45 days. Residents of Boston rushed to buy papers, while Charles maintained interest with paid articles in the press.
But in fact, Charles Ponzi did not buy coupons, which were exchanged exclusively for stamps, but paid old investors the money of new participants. By July, Ponzi bills were bringing him up to $250,000 daily. In August of the same year, the company was inspected by federal agents and liquidated as a pyramid scheme. During the trial, part of the money was returned to the investors, more than 2 million were never found, and the Italian himself received 5 years in prison.
2. Portuguese pyramid of Dona Branca
An ordinary Portuguese woman, Maria Branca dos Santos, most often called Dona Branca, decided to enrich herself by opening her own bank in 1970. To attract customers, she promised an interest rate of 10% per month to any depositor. Poor people from their country rushed to invest money in a bank that could provide them with such rapid financial growth. For 14 years, thousands of clients trusted their money to Dona, who by that time was nicknamed “the people’s banker.” In 1984, the pyramid collapsed, Blanca was arrested and sentenced to 10 years in prison. Maria died alone, although in 1993 her machinations inspired the Portuguese National Opera to stage A Banqueira do Povo (The People's Banker).
3. “Double Check” scheme
No, despite the beautiful name, this scheme has nothing to do with chess. The story begins in 2005, when an ordinary high school teacher from Pakistan, Syed Sibtul Hassan Shah, returned from Dubai to Wazirabad (Punjab province) and made a lucrative offer to his neighbors. Having convinced everyone that on a business trip he learned the latest exchange program, he offered everyone to double their savings in just a week!
That is why the scheme was called “Double Check”. Within a year and a half, the pyramid had grown throughout the country, more than three thousand investors gave him savings worth more than $880 million at the exchange rate of that year. Syed Shah was even planning to become the political leader of the region when the police arrested him. Thousands of people took to the streets demanding the release of their financial guru. At the moment, the hero of the story is behind bars, and the investigation is still ongoing.
4. Lou Pearlman's $300,000,000 Scheme
You may not have heard of Lou Pearlman, but the bands he created certainly have. Thanks to him, such groups as Backstreet Boys and ‘N Sync were born. But he also gained his fame thanks to a criminal scheme worth $300 million, which he “raised” by deceiving investors and large banks. In 1981, former tycoon Lou Pearlman founded Trans Continental Airlines Travel Services, Trans Continental Airlines Inc and a dozen other organizations that existed solely on paper. Which, by the way, did not stop him from selling shares in these companies for 20 years!
When the scheme was discovered, Lu tried to flee the country and was sentenced to 25 years in prison and a $1 million fine. And this is after he made a deal with the court, where he admitted fraud against about 250 victims who lost over $200kk, as well as 10 financial institutions that lost about $100 million.
5. European Royal Club
The non-profit association “European Kings Club” was organized by Damara Bertges and Hans Gunter Spachtholz in 1992 and was positioned as a real force opposing large European banks and capable of helping small businesses.
Under this scheme, new members of the European Royal Club had to buy a “letter”, which was essentially a share of the club. The cost of such a share was 1,400 Swiss francs. This “letter” gave the owner the right to receive 200 francs monthly, which guaranteed the investor to double his contribution within a year.
The criminal scheme was uncovered only 2 years later, when about a hundred thousand German and Swiss investors lost a total of about 1 billion US dollars. Even during the sentencing, the victims refused to acknowledge the fraud and booed the judge. The enterprising Damara Bertges received 7 years in prison, and her partner only 5.
6. Bernard Madoff Scam
Barnard Medoff's pyramid scheme is one of the largest financial scams in modern history. Among the victims are more than three million people and hundreds of financial institutions that lost their savings totaling more than 64.8 billion.
Bernard opened the Madoff Investment Securities investment fund, which had a reputation as one of the most reliable and profitable in the United States. Investors who invested in Madoff could receive 12-13% per annum. Most investors were convinced that this company was able to achieve such success thanks to insider information, and a serious list of clients, including numerous hedge funds, banks and celebrities, was a kind of guarantee of the reliability of this fund.
In the fall of 2008, a number of large investors turned to Madoff with a request to give out their invested funds totaling about $7 billion, but the fund simply had nothing to pay. The pyramid collapsed. It turned out that Madoff Securities has not been investing investors' money for at least the last 13 years! At the time of the proceedings, the company's debt amounted to approximately $50 billion. It is also noteworthy that Madoff’s own sons turned him in to the FBI, to whom he told about his biggest lie in the Ponzi scheme.
In contrast to the relatively short sentences of previous pyramid schemers, Bernard Madoff was sentenced to 150 years in prison.
7. Wang Feng's Ant Farms
A rather unusual financial pyramid was built by Chinese businessman Wang Feng. In 1999, he opened the company “Yilishen Tianxi Group of China” and offered anyone who wanted to become an investor for only $1,500. For this money, investors received a box with special ants, which had to be fed and raised according to special instructions for 90 days. After this time, company representatives came and took the insects back, processing them into aphrodosiacs or medicine to treat arthritis. At least that's what the company told poor Chinese farmers.
After every 14 months of such hassle, investors received about $450, which was equal to a 32% annual return. This pyramid was also successful because Wang Feng quickly became rich and managed to get promoted in newspapers and television. He even became a state nominee. "China's 100 Best Businessmen" Award.
When the company's turnover reached about two billion dollars, Wang's ant scheme collapsed, and he himself was arrested and sentenced to death.
8. MMM by Sergei Mavrodi
The largest financial pyramid in the history of Russia, founded by Sergei Mavrodi together with his brother Vyacheslav and his wife Marina. The name of the company “MMM” was nothing more than an abbreviation of the names of the founders. As you and I remember, in the early 90s, this private company offered its investors 1000% dividends, luring millions of residents of the country into the pyramid. Over the five years of his work, Mavrodi received over $1.5 billion.
His activities had such serious publicity that Sergei was even elected to the State Duma and received parliamentary immunity, which did not stop him from being arrested in 2003, when the pyramid finally collapsed. According to Sergei Mavrodi himself, the collapse of MMM is solely the merit of the country’s government.
9. American insurance system
You might be surprised, but social insurance in the United States has a fairly similar structure to the Ponzi laugh that heads our top financial pyramids. In 1935, President Roosevelt introduced this insurance as part of the fight against poverty, which covered older Americans during the Great Depression. These measures allowed the unemployed and pensioners to receive money, which came from taxation of the working part of the US population.
Although Social Security in America has undergone a number of changes over the years, the essence remains the same: old savers get money from new savers. However, analytical firms have calculated that already in 2018 this scheme will face serious, and quite possibly destructive, consequences. During these years, the so-called baby boomers will retire and there may simply not be enough money for everyone.
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