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Cryptocurrency Pyramid Schemes and How to Avoid Them

19 Mar, 2024 10 min read

Cryptocurrency pyramid schemes have a significant impact worldwide. Imagine that a crypto pyramid paid more than $7.8 billion in 2022! Crypto investment fraud increased from $907 million in 2021 to $2.57 billion in 2022, a whopping 200% rise. We can provide many other examples of crypto pyramid fraud. However, the main point of this article is to help you identify well-known crypto scams and learn how to avoid a pyramid scheme. Let's dive in!

Pyramid Scheme. What is it?

The opportunity to make money through crypto trading lures people worldwide. Every day, we see new success stories of crypto investors published on social media and YouTube. After watching the example, many wonder, "Why cannot I do the same?" However, for some reason, we forget how much time and effort successful crypto traders have spent to become who they are today. More importantly, many have learned successful crypto trading and investment schemes by trial and error. It's also very likely many of them have become victims of blockchain pyramid schemes. Unfortunately, by tapping into crypto get-rich-quick schemes, many forget the risk of falling victim to cryptocurrency pyramid schemes. 

So, what are pyramid schemes in cryptocurrencies? Let's put it simply. A pyramid scheme in cryptocurrency involves an unsustainable investment and rewards people for enrolling other users in a business that offers an imaginary, non-existent product. The only source of income for crypto pyramid schemes is that members pay them money for no returns. Early investors are commonly paid the promised big returns, inviting other users to join. In a crypto pyramid scheme variation, investors at each layer charge initiation fees paid by the next layer's investors. The payouts to early investors are comprised of the new money flowing in. When new investors stop rolling in, the crypto pyramid collapses. 

Now that we have figured out "What are cryptocurrency pyramid schemes?" let's consider several examples of the best-known crypto scams in history.

Crypto pyramid schemes have scammed significant amounts of money from unsuspecting victims. Here are some notable examples:

  • OneCoin is a vivid example of a well-known cryptocurrency pyramid scheme from 2014 to 2017. It lured investors with massive returns but became a multi-billion dollar scam. The estimated amount scammed could be as much as $4.4 billion. 
  • Bitconnect is another example of a crypto mining pyramid scheme. It promised investors high returns through a lending program but collapsed in 2028, resulting in around $1 billion scammed. 
  • PlusToken is a large-scale Ponzi scheme and pyramid. In fact, this example is often at the top of the list of crypto Ponzi schemes. The Ponzi scheme scammed around $2 billion before it collapsed in 2029. 
  • Since there is a global interest in Bitcoin before the much-anticipated Bitcoin halving event in 2024, we couldn't have missed the opportunity to add GainBitcoin to the list of the best-known crypto scams. It's known for Amit Bhardwaj, who launched a crypto exchange and offered Bitcoin mining contracts through a multi-level marketing (MLM) scheme. The estimated total amount of the scam is $2.7 billion.

To help with crypto scams' detection, let's get a deeper insight into how can pyramid schemes work. 

Understanding the Mechanisms of a Pyramid Scheme

Cryptocurrency Pyramid Schemes

A cryptocurrency pyramid is a fraudulent business model primarily focusing on recruiting new participants (crypto investors) rather than selling any product or service. A blockchain pyramid scheme (or a crypto mining pyramid scheme) generally works this way: 

  • At the top of the scheme, a promoter or a small group commonly recruits new members by promising high returns quickly. New members commonly pay a fee to join a crypto scheme. 
  • All new members of crypto schemes are encouraged to recruit more members. New recruiters of the next layer pay fees to their recruiters, who should send a percentage of their earnings to the chain. The recruitment and payment circles continue over and over again for as long as the cryptocurrency pyramid scheme operates. 
  • Pyramid cryptocurrency schemes rely on exponential growth, making them insatiable. The pyramid collapses when new investors stop joining and paying entrance fees. When new users stop joining, scammers can only make money by asking current members to pay more while promising them additional revenue. 

Launching and promoting pyramid schemes is illegal in most countries. To prevent you from falling into the trap of a crypto mining pyramid scheme, we should emphasise that crypto schemes are often masqueraded as Multi-Level Marketing (MLM) operations. However, there is a vivid distinction between a scammy scheme and MLM. The latter welcomes members to join to make money through selling products and services rather than recruiting new investors. 

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Varieties of Cryptocurrency Pyramid Schemes

What is a Ponzi pyramid scheme

Several cryptocurrency pyramid schemes exist, each with unique characteristics. Let's review the three best-known crypto scams. 

Ponzi schemes

What is a Ponzi pyramid scheme? This is a scammy crypto scheme that robs one investor to pay another. In a Ponzi scheme, you should not necessarily face a hierarchical structure. However, all new Ponzi schemes promise high returns to existing investors. 

A typical Ponzi scheme involves investment only from new investors joining the pyramid cryptocurrency. Then, those new investors wait for the promised return on their money. The returns are provided as a fee from the money paid by other investors persuaded to join the pyramid. Most investors in the Ponzi scheme end up losing everything when the scheme collapses.

Bernard Madoff is one of the best-known Ponzi crypto scheme scammers. The investment advisor invited many high-profile individuals to invest in a multibillion-dollar Ponzi scheme with him. To convince investors to join in, Madoff presented fake portfolios and paperwork. He paid off early investors to attract more investors with the money he earned from later investors. Most members lost everything. After the Ponzi scheme collapsed, Madoff was sentenced to 150 in prison, where he died on 14 April 2021.

As you can see from the description, Ponzi is one of the most typical crypto mining pyramid schemes. To prevent you from getting into the trap, beware of the following common signs of Ponzi schemes: 

  • No-risk, very high returns. Investors should be very cautious with "guaranteed high returns." Our guides repeatedly mention that all crypto investments carry a certain amount of risk. Check twice and always be wary of investment opportunities that seem too good to be true. 
  • Secretive strategy. Investors should be aware of crypto investment strategies that generate returns exclusively through secretive strategies. Avoid investing in strategies and methodologies that are difficult to understand. 
  • Illiquid crypto investments. Unlike real estate and startup investments, cryptos are liquid by nature. If a crypto asset is illiquid, the investor should clearly understand why and when it will be available for liquidation.

Matrix schemes

Matrix schemes (or "cycler" or "doubler" schemes) are a type of pyramid cryptocurrency scheme in which new participants pay an upfront investment that is distributed among the earlier-joined investors. Such schemes can take various forms, but they generally promise higher returns after recruiting a certain number of new investors. As the name suggests, such crypto schemes commonly have a form of a matrix, like a 2x2 scheme, where each investor should recruit two others to complete their cycle and receive a payment. 

Gifting schemes

Community members gift each other with cryptocurrency in gifting schemes (or "gifting circles"). New investors are asked to make a "gift" payment to join the community. Once they recruit new members, they are promised a significant return on their gift. Such cryptocurrency pyramid schemes commonly use the language of empowerment and mutual aid to attract investors. Like the rest of the crypto pyramids, such schemes consistently recruit new community members to earn gifts. Such schemes inevitably collapse when recruitment stops. 

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Identifying Signs of a Pyramid Cryptocurrency Scheme

It's difficult to spot a crypto pyramid once you join one. However, to prevent the risk of getting involved in such schemes, beware of the following warning signs: 

  • Exaggerated emphasis on recruitment. Cryptocurrency pyramid schemes can operate as long as the investors' community grows. If the community rewards are primarily focused on making you recruit new members, consider it as a warning sign. 
  • You rarely or never sell anything. If you spot little to no commercial activity, that's evidence of a crypto pyramid. 
  • High entrance costs. Beware of the community asking you to invest big sums as upfront costs. 

Guidelines for Safeguarding Against Crypto Pyramid Schemes and Securing Your Investments

To avoid falling into a pyramid scheme, it's essential to cultivate secure financial habits. While investing in a business can be a legitimate way to support an organisation and potentially yield returns, it's crucial to adhere to safe investment practices to ensure that you're engaging with a genuine opportunity:

  1. Refrain from parting with any funds until you have the complete picture. Investing always carries some level of risk. Therefore, refrain from investing any money until you are fully informed about the investment and your role in it. If uncertain, seek guidance from a financial advisor.
  2. Comprehend the risks associated with investments. If an opportunity sounds too good to be true, it likely is. Any promise of substantial returns typically involves significant risks. If easy returns equated to guaranteed wealth, everyone would pursue such ventures.
  3. Invest only amounts you are willing to lose: Unfortunately, individuals involved in pyramid schemes seldom recover their invested funds. It is advisable only to invest small sums that you are prepared potentially not to recoup.

The Bottom Line

Cryptocurrency pyramid schemes are illegal in most countries. Pyramids generally encourage investors to recruit their family, friends, and other close people. Investors should be cautious about avoiding such schemes since they can not only affect their financial well-being but also strain relationships with the people whom they recruit. 

Regardless of the cryptocurrency pyramid scheme or investment opportunity they are facing, investors should be aware of how it works, the risk involved, and the real money-making guarantees. Cryptocurrency investment always involves certain risks, which increase manifold when you fall victim to pyramid scams. Just like any crypto investment with high volatility, investors should be ready for periods of high and low returns. When making money with crypto, always do your own research and never invest more money than you can afford to lose. 

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