Ponzi Scheme: Explained

Elizabeth Wright
| Editor:
July 20, 2023
6 min read

Some people unfamiliar with crypto call the industry and Bitcoin, in particular, a Ponzi scheme. This claim, fortunately, is far from the truth. This article will help you shed light on what Ponzi scheme actually is and what is the concern?

Where did “Ponzi” come from?

In 1919, the Italian Charles Ponzi moved to America and founded the “The Securities Exchange Company”, which issued debt receipts with the obligation to pay $1,500 for every $1,000 invested in 90 days. In the spring of 1920, Ponzi acquired a great mansion in the prestigious area. In Summer he was detained due to a tax audit revealed a $7 MLN debt.

The scheme Ponzi used as a form of fraud with attractive, at first glance, conditions for investors and profit promises. In fact, the “profit” for the scheme victims derives from the contribution of earlier investors. For average, non-financially-savvy people, especially in the crypto industry, Ponzi may seem like a sustainable business. In fact, this business only exists as long as there are new investors to contribute and as long as they believe in the dividends they get. Eventually, the Ponzi scheme is doomed to failure in any case.

A Ponzi scheme usually requires to register a legal entity, bank account and obtain a license to accept deposits and create advertisements, thus such schemes are often disguised as a conditional product, such as vouchers or club discount cards.

Is cryptocurrency a pyramid?

The crypto itself is promising technology of digital money that, unfortunately, can be used in pyramid schemes like any other means of payment. This is a currency, the operations are protected by mathematical algorithms and registered in the public blockchain distributed in the network. However, crypto can be used for purchasing goods and services used in pyramid schemes. You should know these schemes in order to protect yourself from scams.

How pyramids are used in cryptocurrency

A ponzi scheme is far from new, but with the advent of cryptocurrency, it definitely got a second wind because in this area financial activities do not require a legal, bank account, or licenses, and the organizers successfully circumvent many aspects of a legal nature.

The mainstream around the cryptocurrency is an open field for fraudsters who profit from the inexperience of society. Due to the lack of knowledge in society about this topic, it’s easy for fraudsters to promote even inadequate projects. The organizers of such schemes take advantage of the fact that more and more people are attracted by fast earnings in the cryptocurrency world, and therefore it’s much easier for fraudsters to make unreasonable promises and at the same time get enough interest in their proposal.

How to recognize the “Ponzi” scheme in cryptocurrency

In the cryptocurrency world you can distinguish four of the most common types of pyramids:

  • Scamcoins
  • Cloud mining
  • Referral program
  • High yield investment programs

There are some reg flags helping you determine whether it is a fraudulent scheme or not.

  • Risk-free high turnovers,
  • Stable income, whatever the market state,
  • “Secret” investment techniques and strategies,
  • No investment paperwork,
  • Various difficulties on money withdrawal.

Ponzi vs Pyramid scheme

There is a slight difference between a ponzi and traditional pyramid scheme.

A ponzi scheme implies unwinnable fraudulent investments into a fake project. Credulous investors contribute their funds to a “manager” on a ponzi’s side and get revenues that imply the money from other credulous investors.

A pyramid scheme, in turn, implies a self-conducted mechanism, where one investor recruits the other investor and gets a revenue from that investor, who must recruit another one the same way, and so on.

Both schemes involve credulous people taking their revenues from other credulous people.

Some fishy crypto businesses are based on a pyramid scheme. Beware of them and never get involved into their shady activities.

Cloud mining pyramid

When you see an offer to purchase a computing power or rent an equipment for cloud mining, you should understand that today mining is very different then a couple of years ago. Today, the mining difficulty is much higher, and the profit from mining depends on a range of factors. Buying a share in such a pool costs quite a lot of money, they do not promise any super-high incomes and are unlikely to even set a fixed rate on your investments.

Referral program pyramid

The referral program can be a good tool if only it’s not a referral program of the financial pyramid. Such type of doing is called matrix marketing, in which a person needs to attract new investments by himself in to get an income. Such a scheme is probably the easiest for the organizers and sad enough for the participants because in order to get your money back you need to attract 5 people, for example. The 5, in order to get their money back, will have to invite 25 people in total, and then 125 people must throw off their money for the first 25 and so on.

“High yield” investment pyramids

Another common type of pyramid offering to transfer funds “experienced traders”. In the same way, they promise ultra-high returns in a short time and for the long term, although in reality this yield cannot be predicted even for tomorrow. They, of course, trade, and even may gain profit from trading, but this profit won’t concern you. All the payments to investors mainly derive from the means of new deposits, since it’s known that even the best traders cannot make profitable trades all the time. Conventional wisdom says that such thing as a “win-only trading” strategy simply doesn’t exist.

Scamcoins pyramid

And another popular type of cryptocurrency pyramids is fake cryptos that declared as an improved version of any of the cryptocurrencies and promise the great potential.

Because most of the cryptocurrency users were attracted by such a perspective, it’s not surprising that such offers are in demand. However, such projects, as a rule, have neither public blockchain, nor publicly available code, nor placement on well-known exchanges, which means, most likely, they are nothing more than a manipulation aimed to create the appearance of constantly growing prices and interest in the project.

How to protect yourself from the pyramids

  • Never trust, verify. Research the company offering the investment opportunity, it should be legally registered and this information shouldn’t be hidden.
  • Not sure – don’t do it. Don’t trust your money to the will of chance, don’t hesitate to follow the formalities, study the question and make an informed decision.
  • Cold calculation. If you are excited so much that you are ready to invest everything that is and even borrow some more, then this is a disturbing sign.


Ponzi and pyramid are different fraudulent schemes that you may encounter in the crypto world from time to time. You need to abstain from participating in these schemes no matter how appealing their proposal is. By following the simple rules, you’ll always stay protected from such scams and never associate ones with crypto. And remember, you can’t fall prey to fraudulent schemes if you invest wisely.

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