- Key Takeaways
- Pyramid Scheme vs Ponzi Scheme – An Overview
- What is a Pyramid Scheme?
- How Do Pyramid Schemes Work?
- Crypto Pyramid Scheme Examples
- What is a Ponzi Scheme?
- How Do Ponzi Schemes Work?
- Crypto Ponzi Scheme Examples
- Ponzi Scheme vs Pyramid Scheme – What’s the Difference?
- Is Bitcoin a Ponzi Scheme?
- How to Spot Ponzi and Pyramid Schemes in Crypto
- Closing thoughts
Key Takeaways
- Ponzi and pyramid schemes may seem similar, but they operate differently—Ponzi schemes disguise themselves as investments, while pyramid schemes revolve around recruitment.
- Some of the biggest crypto scams, including OneCoin, BitConnect, and PlusToken, have stolen billions from unsuspecting investors, proving how devastating these schemes can be.
- Warning signs like guaranteed returns, pressure to recruit, and a lack of transparency indicate potential fraud.
- To avoid falling victim, investors should conduct thorough research, stay informed about blockchain developments, and remain skeptical of promises that sound too good to be true.
In the bustling world of cryptocurrency, new projects often generate excitement and skepticism, and accusations of “ponzi scheme” and “pyramid scheme” run rife. Even after 16 years, critics still regularly label Bitcoin a Ponzi scheme. Meanwhile, a more recent example is Pi Coin. The project has been met with exuberance and suspicion in equal measure, with many claiming it’s a sophisticated pyramid scheme.
These two terms are often used interchangeably, but are quite different. What do these terms actually mean and more importantly, how can investors protect themselves from these two distinct types of threat?
This article explains the differences between Ponzi schemes and pyramid schemes, provides real-world crypto examples, and provides tools to identify red flags in the industry.
Pyramid Scheme vs Ponzi Scheme – An Overview
Many people confuse Ponzi schemes and pyramid schemes, but they describe two distinct types of financial fraud. Fraudulent crypto projects often mix elements of both, making them harder to spot. The table below highlights their key differences:
| Characteristic | Ponzi Scheme | Pyramid Scheme |
|---|---|---|
| Primary Mechanism | Uses funds from new investors to pay earlier investors. | Participants earn money primarily by recruiting new members. |
| Product or Service | Often involves fake investments or no real product. | May have a product, but recruitment is the primary focus. |
| Sustainability | Collapses when new investments dry up. | Collapses when recruitment slows down. |
| Promotional Tactics | Promises high returns with little risk. | Focuses on financial benefits of recruitment. |
What is a Pyramid Scheme?
A pyramid scheme is a fraudulent business model where participants make money primarily by recruiting new members rather than selling a legitimate product or service. Each new recruit pays a fee to join, and a portion of that fee goes to the recruiter and those above them. The operator at the top takes the biggest cut, ensuring they profit the most.
The system collapses unless it continuously attracts new recruits. Since recruitment eventually slows, most participants—especially late joiners—lose money.
Key Characteristics of a Pyramid Scheme
| Feature | Description |
|---|---|
| Recruitment-Based Model | Earnings come from bringing in new members rather than selling products or services |
| Unsustainable Growth | Requires exponential recruitment to continue operating, which is impossible long-term |
| Hierarchical Structure | Money flows upward to earlier participants, enriching those at the top |
| False Legitimacy | Often disguised as a multi-level marketing (MLM) business, but earnings rely on recruitment rather than product sales |
| Collapse is Inevitable | Once recruitment slows down, the scheme unravels, and most participants lose money |
How Do Pyramid Schemes Work?
Say your friend Alex introduces you to an “exclusive investment opportunity” with the promise of easy earnings. To join, you must pay a $500 entry fee. Alex explains that making money is simple and that you just need to recruit new members, who will also pay the $500 fee. A portion of their payments goes to you, while another cut goes to Alex and earlier participants.
At first, the system appears to work. Motivated by the potential earnings, you recruit five friends and collect commissions from their payments. They are encouraged to do the same, bringing in more members to keep the money flowing.
However, as the scheme grows, finding recruits becomes harder. The structure collapses when recruitment slows, and late joiners lose money. Meanwhile, those at the top walk away with the money they’ve been collecting.
Crypto Pyramid Scheme Examples
Cryptocurrency has provided fertile ground for pyramid schemes, often disguised as innovative blockchain projects. These schemes lure investors with promises of high returns, but in reality, they rely on recruitment rather than actual crypto utility. Here are some of the most infamous cases:
OneCoin
In 2014, Ruja Ignatova launched OneCoin, claiming it was a revolutionary cryptocurrency. Investors were encouraged to buy educational packages that supposedly included OneCoin tokens. However, the real money came from recruiting new members, who also had to buy packages.
Despite its polished marketing, OneCoin had no real blockchain. The scheme collapsed, costing investors an estimated $4.5 billion. Ignatova vanished in 2018 and remains one of the FBI’s most wanted fugitives.
BitClub Network
Between 2014 and 2019, BitClub Network promised investors huge profits through crypto mining pools. To join, investors paid membership fees, and rewards supposedly came from mining operations.
Authorities exposed BitClub’s fake earnings, revealing that recruitment—not mining—funded payouts. Investors lost over $722 million as the scheme collapsed, and authorities arrested key operators for fraud.
Forsage
Launched in 2020, Forsage claimed to be a decentralized smart contract investment platform. Participants had to buy slots and could earn money by recruiting others.
Forsage marketed itself as a “smart contract matrix project,” but regulators like the SEC identified it as a pyramid scheme. It defrauded investors of hundreds of millions of dollars before authorities shut it down.
What is a Ponzi Scheme?
In a Ponzi scheme, early investors receive payouts using funds from new investors rather than actual profits. Charles Ponzi made this scheme famous in the early 20th century, promising high returns with little risk.
These scams often appear legitimate, with detailed investment strategies and steady payouts, but they collapse when new investments slow. By the time authorities expose the fraud, most investors usually have lost their money.
| Feature | Description |
|---|---|
| Fake Investment Model | Investors believe their money is being placed in a legitimate business, but it is actually used to pay earlier participants |
| Guaranteed High Returns | Promises of consistent, high returns with little or no risk—often too good to be true |
| No Real Revenue Source | Money is not generated through legitimate investments but is instead shuffled between participants |
| Operator-Controlled | A single person or group manages all the funds, keeping operations secretive |
| Eventual Collapse | When new investments slow down, payouts stop, and the scheme unravels |
How Do Ponzi Schemes Work?
David, an investment manager, claims to have a crypto trading algorithm that guarantees 15% monthly returns. The offer sounds too good to pass up, and investors eagerly hand over their money.
Each month, David pays early investors using funds from new investors, not actual crypto trades. As word spreads, more investors join, believing they are profiting. David collects deposits, using some for payouts while keeping the rest.
The scheme collapses when new investments slow down. As withdrawals increase, David fails to pay out, exposing the fraud. When authorities intervene, most investors have lost their money, while David flees or faces arrest.
Ponzi schemes exploit trust, making them especially dangerous in crypto, where technical complexity helps scammers hide fraud.
Crypto Ponzi Scheme Examples
Cryptocurrency has been a breeding ground for Ponzi schemes, with scammers exploiting investor enthusiasm for digital assets. Here are some cases:
BitConnect
Launched in 2016, BitConnect promised 1% daily returns using an automated trading bot. Investors had to trade Bitcoin for BitConnect tokens (BCC) to “lend” to the platform.
Authorities exposed BitConnect’s fake trading bot, revealing that returns came solely from new investor deposits. When it collapsed in 2018, investors lost $2.4 billion, making it one of the largest crypto Ponzi schemes ever.
Mirror Trading International (MTI)
MTI, a South African-based platform, promised 10% monthly returns through artificial intelligence (AI) – powered Bitcoin trading. However, investigators found no AI trading existed—MTI simply recycled new deposits to fund payouts.
The scheme collapsed in 2020, with over $1.7 billion lost. The founder disappeared before authorities could arrest him.
PlusToken
A massive Ponzi scheme disguised as a crypto wallet and exchange, PlusToken targeted investors in China and South Korea between 2018 and 2019. The platform lured users by offering high interest on crypto deposits, claiming funds were used for profitable blockchain investments.
When withdrawals stopped in mid-2019, it became clear that PlusToken was a fraud. Investigators estimated the scam stole over $3 billion in Bitcoin, Ethereum, and other cryptocurrencies. While several key members were arrested, a large portion of the stolen funds remains unaccounted for.
Ponzi Scheme vs Pyramid Scheme – What’s the Difference?
At first glance, Ponzi and pyramid schemes share key similarities—both rely on a continuous flow of new money rather than legitimate business activity. Neither generates real profits, and both ultimately collapse when recruitment or new investments slow down.
However, the mechanics differ. A Ponzi scheme presents itself as an investment, where investors believe they’re earning returns. In reality, new investor deposits fund payouts. A pyramid scheme, by contrast, requires participants to actively recruit others to earn money.
Is Bitcoin a Ponzi Scheme?
Bitcoin has been accused of being a Ponzi scheme but does not fit the criteria. Unlike a Ponzi scheme, Bitcoin does not promise guaranteed returns or require new investments to pay earlier investors. Bitcoin operates on a decentralized network, and its value is determined by market demand rather than fraudulent redistribution of funds. While scams exist within the crypto industry, Bitcoin itself is not a Ponzi scheme.
How to Spot Ponzi and Pyramid Schemes in Crypto
Here are some warning signs:
- Promises of guaranteed high returns with little or no risk.
- Pressure to recruit new investors to earn profits.
- Lack of transparency in how profits are generated.
- Difficulty withdrawing funds from the investment.
- Over-reliance on hype rather than real technological development.
Closing thoughts
Scammers always reinvent the same old tricks, dressing them up in flashy new technology. Ponzi schemes promise easy profits, while pyramid schemes push endless recruitment. Both feed on trust and greed until they collapse.
In a scenario where an opportunity guarantees sky-high returns with no risk, take a step back. If making money depends on bringing in more people, it’s time to walk away. The best defense is to stay sharp, ask questions, and never invest in something you don’t fully understand.
