What are cryptocurrency pyramid schemes, and how to avoid them?

Key takeaways

• Crypto pyramid schemes rely on recruits’ investments rather than legitimate products. Only a few people at the top benefit, and when the scheme collapses, most investors lose money.
• Pyramid scheme scammers use cryptocurrencies like Bitcoin or Ether to attract investors, promising high returns. However, these schemes lack value and focus on recruiting new participants.
• If a project emphasizes recruitment over real value, it’s likely a pyramid scheme. Transparency is another key factor for identifying scam projects.
• Pyramid schemes are illegal in many countries, and participation can result in fines or imprisonment. To avoid falling victim, conduct thorough research, verify the project’s legitimacy, and avoid projects that focus on recruiting new investors.

Crypto has been transforming the financial world for years, offering new ways for investors to make money. But sadly, it also attracts scammers who are always searching for ways to cheat people. One of the go-to methods for scammers is cryptocurrency pyramid schemes.

Imagine a block-based pyramid, where each block is an investor. You and many others join in, investing your money and hoping to get rich fast. But in the end, only a small group at the top profits. The whole structure is shaky, like a real pyramid, and eventually collapses, leaving most investors with losses.

This article breaks down what cryptocurrency pyramid schemes are, how they operate and how you can avoid them.

What is a pyramid scheme?

A pyramid scheme is a fraudulent business model in which income doesn’t come from selling products or services but from convincing new members to join. The operators use the money from recent recruits to pay earlier members. Essentially, it’s just a game of moving money around with no real business or value being created.

Eventually, the program will run out of new members, so payments will stop. When that happens, the whole system collapses, and most members — especially those at the bottom of the pyramid — lose money.

Pyramid schemes have been around for a long time. One of the most famous examples is Charles Ponzi’s early 20th-century scam, where he paid old investors with new recruits’ money. His scheme inspired the term “Ponzi scheme.” 

Laws were introduced in the 1930s to protect people from these scams, but pyramid schemes evolved into multilevel marketing (MLM) in the mid-20th century. While many MLMs are legal, regulatory bodies have restricted them to prevent abuse. The internet has only made these scams easier to spread and harder to detect.

Did you know? In the 1920s, Charles Ponzi lured investors with promises of a 50% return in just a few months, claiming to invest in international mail coupons. To keep the scheme going, Ponzi used money from new investors to pay off earlier investors, creating the illusion of profit.

What are cryptocurrency pyramid schemes?

Cryptocurrency pyramid schemes are just like traditional ones, but with a twist — they use cryptocurrencies. Scammers lure victims by playing on their curiosity about digital coins like Bitcoin (BTC), Ether (ETH) or Solana (SOL). 

The typical pitch? Invest in a new coin and bring in more people to boost your returns. But the project has no real value, just like traditional pyramid schemes. These scams often disguise themselves as mining pools, investment clubs or initial coin offerings (ICOs).

According to a June 2023 report, around $7.8 billion was funneled into Ponzi or pyramid schemes in 2022 alone, highlighting the widespread nature of these scams.

Examples of cryptocurrency pyramid schemes

Here are two examples of infamous crypto pyramid schemes that will help you understand how they work:

OneCoin

OneCoin, functional between 2014 and 2019, was marketed as a revolutionary cryptocurrency poised to rival Bitcoin. Investors were promised huge returns, and the project became especially popular in Europe. But in reality, it was nothing more than a pyramid scheme, with profits only made through referrals. 

The project didn’t add any value to the crypto space. One of its founders, Ruja Ignatova, also known as the crypto queen, has been on the run since 2017, while her co-founder, Karl Sebastian Greenwood, was sentenced to 20 years in prison in September 2023.

Bitconnect

Launched in 2016, Bitconnect promised large profits through an automated trading bot. Investors locked up their Bitcoin in exchange for Bitconnect tokens used on the platform. 

But Bitconnect was another pyramid scheme, where new investor funds paid out “profits.” Bitconnect’s token value plummeted when the scheme collapsed, leading to massive losses. The founder, Arcaro, was sentenced to 38 months in prison in September 2022.

Did you know? In January 2023, investigative journalist Jamie Bartlett, host of The Missing Cryptoqueen podcast, uncovered a potential connection between Ruja Ignatova and a penthouse apartment in Kensington, London. This discovery reignited hopes of her arrest.

Difference between genuine crypto projects and pyramid schemes

The key difference between a legitimate crypto project and a pyramid scheme is how they generate revenue. In real projects, value comes from innovation and service quality. Pyramid schemes, on the other hand, rely solely on new investments to keep running.

How do cryptocurrency pyramid schemes work?

Cryptocurrency pyramid schemes usually have a pretty simple setup, but they try to hide their true intentions behind fancy tech terms or business plans. Here’s how they typically operate:

1. The hook: Scammers create a new coin or investment opportunity and hype it up through influencers or social media. They play on crypto investors’ “get in early” mindset, promising big returns with little to no risk.
2. Recruitment: Once you’re in, scammers encourage you to bring in new members. They tell you the more people you recruit, the more money you’ll make.
3. Initial payments: At first, you might see good returns, but those payouts come from the investments of newer members, not from actual profits. This model can’t last forever.
4. The bubble grows: As more people join, the scheme gets bigger. Promoters encourage you to reinvest your profits, making it seem like the system works.
5. The collapse: Eventually, the scheme runs out of recruits. The promoters disappear with most of the money, leaving most participants with losses.

Warning signs of a cryptocurrency pyramid scheme

Want to spot a pyramid scheme before it’s too late? Watch out for these red flags:

• Promises of high returns: If someone guarantees huge profits without explaining any risks, it’s a major warning sign.
• Focus on recruitment: If recruiting others is the main way to make money, you’re probably looking at a pyramid scheme.
• Lack of transparency: Legitimate crypto projects are upfront about how they work. Be cautious if you can’t get clear information about how your money will be used.
• No real product or service: Pyramid schemes, like innovative tech or useful services, don’t offer any real value.

How to protect yourself from crypto pyramid schemes?

Now that you know the warning signs, here’s how you can protect yourself:

• Do your research: Before investing, dig into the details. Who are the founders? Do they have a solid reputation, or are there red flags? How long has the project been around? A quick search can often tell you a lot.
• Look for transparency: Legitimate projects explain how they work and where your money goes. Check if a white paper outlines the tech behind the project and how it plans to make money.
• Avoid recruitment-focused opportunities: If making money depends more on recruiting people than on the actual investment, steer clear.
• Verify the product or service: Make sure there’s a real product or service behind the investment. If they can’t clearly explain how the project will make money, something’s off.

Legal consequences of participating in pyramid schemes

Participating in a pyramid scheme isn’t just risky; it’s illegal in many countries. You could face legal trouble even if you didn’t know it was a scam. Here’s a look at some of the laws against pyramid schemes in different countries:

• United States: Federal Trade Commission regulations
• United Kingdom: Trading Schemes Regulations
• Canada: Competition Act
• Australia: Australian Consumer Law
• India: Prize Chits and Money Circulation Schemes (Banning) Act of 1978
• South Africa: Consumer Protection Act of 2008

Did you know? PlusToken, a massive crypto Ponzi scheme, lured millions of investors with promises of high returns. The scam, heavily marketed on WeChat, collapsed in 2019, leaving investors with billions in losses. Authorities arrested several key figures and seized billions of dollars of crypto assets linked to the scheme.

What to do if you’ve been scammed

If you think you’ve fallen for a cryptocurrency pyramid scheme, here’s what you should do:

• Report the scam: Contact your local authorities or financial regulators, such as the Securities and Exchange Commission in the US. This helps prevent others from getting scammed and could lead to legal action against the fraudsters.
• Seek financial and legal advice: If you’ve lost money, get advice from a financial professional or lawyer specializing in fraud cases. Recovering your funds can be tough, but they can guide you through your options.
• Learn from the experience: It’s hard, but being scammed can teach you valuable lessons. Stay educated about pyramid schemes and other scams to avoid them in the future.

Cryptocurrency pyramid schemes prey on people’s hopes of getting rich quickly. You can protect yourself by understanding how they work and staying alert for red flags. Always do your research, demand transparency, and be cautious about any investment that seems too focused on recruitment. Staying informed and vigilant is the best way to avoid becoming a victim.