Ponzi and Pyramid schemes share many of the same characteristics that are used to lure and defraud unsuspecting investors.
The reason these schemes aren’t easy to identify is because early investors are, in fact, truly earning returns on their investments, which then motivates them to invite friends and family to join.
What’s the difference between them?
A Ponzi scheme commonly requires financial investments from budding investors, promising guaranteed returns at a future payment date. Investors deposit crypto or money for crypto into an "investment fund". When the investor requests a pay-out, “investment managers” attempt to convince them to reinvest their profits and, if that fails, investors are paid from the incoming investments from new investors.
A pyramid scheme offers members the opportunity to make money by explicitly requiring them to recruit more investors. If investors do not continue to recruit new people to join, the scheme collapses because it can only offer consistent "profits" as long as the number of investors grows.
Simply put, these types of schemes sustain themselves by taking money from new investors to pay earlier investors. Once no new investors are joining the scheme, it collapses and scheme founders leave with all the money.
Here are some of the ways to spot a Ponzi or pyramid scheme
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The promise of unrealistically high “guaranteed” returns that don’t match returns offered by other companies in the industry
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The scheme is generally framed as a risk-free way to earn passive income, promises financial freedom, or the opportunity to become your own boss
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A website that doesn't clearly state who owns the company or vaguely describes its management as "a team of crypto experts"
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Information about the product, service, or business strategy does not exist
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There is no way to verify how many people are part of the scheme, or how much money has been invested
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Vague or complex business strategies that “customer service” can’t explain
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Being prompted to purchase various packages, generally labeled as gold or silver, etc.
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You are encouraged to keep reinvesting your “profits” instead of withdrawing them
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You are required to recruit new investors into the “investment fund” so that you can earn your “profit”
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Your returns increase with the number of new members that you recruit to the scheme
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