Cryptocurrency: Pyramid Scheme v.s Ponzi Scheme?

Have you ever heard your friends or relatives say they fell for a Ponzi scheme? It can be traced back to the early 20th century; however, it still exists today. In fact, Ponzi schemes have cost people millions of dollars. The basis for this scheme has been investments using paper currency; hence real money was stolen. However, with new investment forms like cryptocurrency, Ponzi schemes are used to steal digital currencies. While some people call cryptocurrency a Ponzi scheme, others call it a Pyramid Scheme. Both schemes are considered scams; however, they have subtle differences. So is cryptocurrency a Pyramid scheme or a Ponzi scheme? 

Ponzi v.s. Pyramid Schemes

Ponzi Schemes

• Scammer adds investors to the scheme
• Investment is given to a portfolio manager
• No opportunities for investment are provided – only transfer of funds between clients
• Payouts received by old investors are funds of new investors

Pyramid Scheme

• Scammer recruits initial investors who add other investors to the scheme
• Investment is given to the investor who recruited you
• Investment opportunities are provided, for example, selling a product
• Difficult to prove compared to the Ponzi scheme
  

To elaborate further on the point that proving pyramid schemes is harder, companies’ legal teams are more influential and qualified than lawyers representing victims of the scam. Hence, it is easy for companies to fight cases filed against them. A real-life example of this is Herbalife (HLF) which was accused of being a pyramid scheme and paid $200 to compensate victims. However, the company products are still sold in the market, and the company is financially stable. 

Cryptocurrencies: In Discussion With Experts

Now that you know the fundamental differences between Ponzi and Pyramid schemes let’s look at what people in the tech and banking sectors globally have to say about cryptocurrency.

1. Norway

Vivaldi is a browser founded by a company in Norway. The company CEO, Jon Von Tetzchner, has stated cryptocurrency is ‘nothing more than a pyramid scheme posing as currency.’ Furthermore, Tetzchner claims that the highly volatile nature of cryptocurrency prevents it from being used as an actual currency. Hence people only consider it an investment part of investment schemes, for example, pyramid schemes that require investors to recruit more investors, and based on whether they can do this, they earn money. 

Similarly, cryptocurrency requires you to find people willing to purchase tokens from you, and those people find more people to buy tokens from them. This cycle continues until you can’t find people to buy the cryptocurrency, similar to when you can’t add more investors to the pyramid scheme. Thus, cryptocurrency trading is not profitable anymore, and the pyramid scheme fails. Moreover, Tetzchner states creating their own cryptocurrency or making their browser compatible with crypto would be ‘unethical, plain and simple.’ 

2. India

A research company, Chainalysis, reported an increase of 641% in the Indian cryptocurrency market in 2021. However, the deputy governor of the Reserve Bank of India (RBI), T. Rabi Sankar, stated cryptocurrency is similar to a Ponzi Scheme and advised banning it for good. Similarly, he said that cryptocurrencies cannot be defined as a currency because they don’t have “intrinsic value” or “underlying cash flows.”

Although the government proposed recognition and taxation of digital currencies by 2023, the RBI has criticized cryptocurrencies as a method for transactions or making investments in general. Sankar also said, “Cryptocurrencies are very much like a speculative or gambling contract working as a Ponzi scheme.” The profit received by old investors comes from new investors’ funds in Ponzi schemes, similar to getting returns on your cryptocurrency through trading with other investors.

Say No to Fraudulent Schemes With Global Payback!

Experts refer to cryptocurrencies as Pyramid and Ponzi Schemes. But if you fall victim to either of these scams, it is essential to differentiate between them. It might be challenging to do so; however, Global Payback has your back! The company provides free consultancy through its website related to cryptocurrency scams. Moreover, a team of technological and legal experts collect evidence and file a case against the scammers on your behalf. Hence, you can find out the type of scam and recover the funds lost to the fraud.