Pyramid schemes are one of the oldest and most notorious scams in the world. They promise quick and easy money, but they are actually designed to enrich the few at the top while leaving the majority at the bottom with nothing. In this blog post, we will explain what pyramid schemes are, how they work, and how to avoid falling for them.
What is a pyramid scheme?
A pyramid scheme is a fraudulent business model that recruits members via a promise of payments or services for enrolling others into the scheme, rather than supplying investments or sale of products . As recruiting multiplies, recruiting becomes quickly impossible, and most members are unable to profit; as such, pyramid schemes are unsustainable and often illegal .
The word pyramid reflects the model’s structure—a leader or small group of organizers at the top of the scheme and an increasingly broad base of members below them. The scheme starts with a single point on top where the original members exist and becomes progressively wider toward the bottom as people are recruited by every level of recruits .
Each of these new members usually pay an entrance fee, which is used to pay the people above them. Members are told they can earn money by recruiting other members and, in some cases, by selling products. The organizers promote the illusion of an ever-increasing flow of income to current members derived from each new level of members recruited .
In some schemes, current members may receive a so-called commission from new member fees; however, most of the money goes to the organizers. The scheme’s commission agreements are usually complex and tend to focus more on recruiting than on revenues from sales. In addition, any products or services offered by the organization rarely have any market value. The only real revenue comes from new members’ fees or from the organizers asking current members for more money while promising members additional future revenue .
How does a pyramid scheme work?
A pyramid scheme works by exploiting the greed and gullibility of people who want to make money fast. The organizers lure them in with false promises of high returns, testimonials from successful members, and pressure tactics to join quickly before the opportunity is gone. They also use social proof, such as celebrity endorsements, fake reviews, or online forums, to create a sense of legitimacy and trust .
Once people join the scheme, they are encouraged to recruit more people and to invest more money into the scheme. They are told that they will receive a percentage of their recruits’ fees and that they will earn more money as they move up the ranks of the pyramid. They are also told that they will receive bonuses, rewards, or prizes for reaching certain milestones or goals .
However, the reality is that most people who join a pyramid scheme never make any money at all. They end up losing their initial investment and any additional money they put into the scheme. They also waste their time and energy trying to recruit others who will also lose money. They may also face legal consequences for participating in an illegal activity or for misleading others into joining .
The pyramid scheme collapses when there are no more new recruits or when the authorities intervene. The organizers usually disappear with the money or face criminal charges. The majority of the members are left with nothing but debts, regrets, and broken relationships .
How to avoid falling for a pyramid scheme?
The best way to avoid falling for a pyramid scheme is to be skeptical and do your research before joining any business opportunity that sounds too good to be true. Here are some warning signs that indicate a possible pyramid scheme .
- The company has no clear product or service to sell or offers products or services that have little or no value.
- The company focuses more on recruiting new members than on selling products or services to customers.
- The company requires a large upfront fee or a recurring fee to join or to stay in the business.
- The company promises high returns in a short period of time with little or no risk or effort.
- The company does not provide clear information about its ownership, location, history, financial situation, or legal status.
- The company uses high-pressure sales tactics, such as urging you to act now, not to miss out on a once-in-a-lifetime opportunity, or not to listen to negative opinions from others.
- The company does not offer any training, support, or customer service.
If you encounter any of these red flags, you should avoid joining the company and report it to the relevant authorities. You should also be wary of any friends, family members, or acquaintances who try to recruit you into such a scheme. They may not be aware that they are involved in a scam or they may be trying to recover their losses by recruiting you.
Examples of pyramid schemes
There are many examples of pyramid schemes that have been exposed and shut down by the authorities. Some of the most famous ones are:
- Bernie Madoff’s Ponzi scheme: This was one of the largest and longest-running pyramid schemes in history, involving billions of dollars and thousands of investors. Bernie Madoff, a former Wall Street financier, promised his clients consistent and above-average returns by investing their money in a secret strategy. In reality, he was using the money from new investors to pay off the old ones, while keeping a large portion for himself. He was arrested in 2008 and sentenced to 150 years in prison .
- Herbalife: This is a multilevel marketing company that sells nutritional supplements and weight-loss products. It has been accused of being a pyramid scheme by several regulators, activists, and whistleblowers. They claim that Herbalife’s business model relies on recruiting new distributors who have to buy large amounts of products to qualify for commissions and bonuses. They also claim that Herbalife’s products are overpriced, ineffective, and potentially harmful. Herbalife has denied these allegations and has settled some of the lawsuits against it .
- OneCoin: This is a cryptocurrency-based pyramid scheme that was founded in 2014 by a Bulgarian woman named Ruja Ignatova. She claimed that OneCoin was the next Bitcoin and that it would revolutionize the financial world. She persuaded millions of people around the world to buy OneCoin tokens and packages, promising them huge profits and rewards. However, OneCoin was never a real cryptocurrency and had no blockchain, no value, and no exchange. It was simply a way for Ignatova and her associates to collect money from unsuspecting investors. Ignatova disappeared in 2017 and is still wanted by the authorities .
Conclusion
Pyramid schemes are scams that prey on people’s desire to make money fast and easy. They are illegal, unethical, and unsustainable. They benefit only the organizers at the top while leaving the majority of the members at the bottom with nothing but losses.
To avoid falling for a pyramid scheme, you should always do your homework before joining any business opportunity that sounds too good to be true. You should also be careful of who you trust and what you believe. Remember, if it sounds too good to be true, it probably is.