Most investors who decide to invest in Bitcoin or any other cryptocurrency for the first time, or decide to invest in an Initial Coin Offering (ICO), usually focus on two things. First, return on investment (ROI) represents the final profit they receive from their initial investment. Second, the risks involved in investing. When the risk is too high, investors risk losing the initial capital invested (partially or completely), resulting in a negative return on investment.

Of course, any investment involves a certain degree of risk. However, if investors accidentally fall into informal investment scams, such as Ponzi schemes or pyramid schemes, the risk will be greatly increased. Therefore, it is very important for investors to be able to identify and understand how these scams operate.

What is a Ponzi scheme?

Ponzi scheme - named after Charles Ponzi. Charles Ponzi was a famous Italian fraudster who later immigrated to North America and became famous for his deceptive tactics.

In the early 1920s, Ponzi defrauded hundreds of victims, and his deception ran successfully for more than a year. Basically, a Ponzi scheme is a fraudulent investment scheme that works by collecting funds from new investors to repay earlier investors. The result of this scam is that investors will not get any compensation at all.

The operation case of Ponzi scheme is as follows:

1. The fraudster will receive $1,000 from the investor. He promised to repay the initial investment plus 10% interest after a predetermined period of 90 days.

2. During this promised 90-day period, the fraudster will look for two additional investors. Then, by collecting funds from each of the two investors, the fraudster would pay the first investor the promised amount of $1,100 from the $2,000 received from the two new investors. At the same time, the fraudster may encourage the first investor to reinvest the $1,000.

3. In this case, by continuously obtaining funds from new investors, it is used to pay the promised returns of early investors. And it can convince them to invest again with confidence and invite more people to participate in investment.

4. As the system grows, the fraudster needs to find more new investors to join the scheme, otherwise, he will not be able to pay the promised return on investment.

5. Eventually, the scheme becomes unsustainable and the fraudsters either abscond with the huge sums of money and disappear without a trace, or they are caught.

What is a pyramid scheme?

Pyramid schemes (or pyramid schemes) are common business operations that seek to recruit more new members to a scheme with the promise of payment of fees or bonuses.

For example:

The fraud initiator sells Alice and Bob $1,000. price to purchase the company's dealership rights. After purchasing, Alice and Bob also have the right to sell the dealership themselves and make a profit. A share of the sales for each additional member they manage to recruit must be shared with the sponsor. Split the profits 50/50 from the $1000 collected.

In the above situation, Alice and Bob will have to triple their sales to break even. Because of the profit distribution system, they earn a full profit of US$500 instead of US$1,000 from a sale. If so, their next customers will also bear greater sales pressure to balance the initial investment because they want this system. It also requires more members to achieve, and the plan eventually collapses and loses its sustainability. Pyramid selling has also become illegal because of its unsustainable development.

Most pyramid schemes do not provide a product or service and are only maintained by the funds raised from recruiting new members. However, there are also pyramid schemes that are considered legal to sell services or products. For example, a multi-level marketing company is called (MLM). But often this is done simply to hide potentially fraudulent activity. Therefore, many MLM companies with potentially questionable ethical sales practices use the pyramid model, but not all MLM companies are fraudulent.

Ponzi scheme versus pyramid promotion:

Similarity:

• Both are financial forms of fraud that persuade victims to invest by promising good returns.

• Both require a regular inflow of capital from new investors to remain active and successful.

• Usually, these scams do not offer real products or services.

Difference:

• Ponzi schemes usually promote For investment management services, investors will believe that the returns they receive are the result of legitimate investments. But basically robbing one party to pay the other.

• Pyramid schemes are more network marketing in nature and require investors to recruit new members to earn profits. Therefore, each participant receives a commission before disbursing money to the top of the pyramid.

How to protect yourself

• Be skeptical. Investment opportunities that offer quick high returns on small investments may be dishonest. Especially investing in things that are unfamiliar to you or difficult to understand. If it sounds too good to be true, it probably is a scam.

• Beware of unsolicited but unexpected invitations to long-term investment opportunities, which are usually a red flag.

• The seller and the investment background should be investigated. Find a reputable financial advisor, broker or brokerage firm. Find a reliable registered governing body or relevant supervisory investigation.

• Don't believe it easily. Verification is required. Only invest in legally registered institutions. The first action is to ask for registration information. If it is an unregistered investment opportunity, you should interrogate and ask for a reasonable explanation.

• Make sure you understand what you want to invest in now. You shouldn't invest in something you don't fully understand. Be sure to make the most of available resources and be cautious about confidential investment opportunities.

• Whenever investors come across a pyramid scheme or a Ponzi scheme, they must report it to the appropriate authorities. This will help protect future investors from falling victim to scams.

Is Bitcoin a pyramid scam?

Some people may think that Bitcoin is a big pyramid scam, but this is not the case. Bitcoin is money. It is a decentralized digital currency protected by computer and cryptographic security technology that can be used to purchase goods and services. Just like fiat currencies, cryptocurrencies can be used in pyramid schemes (or other illegal activities), but this does not mean that cryptocurrencies or fiat currencies are a pyramid scheme.