Dangerous schemes in cryptocurrency: how to recognize financial pyramids

Financial pyramids and their difference from cryptocurrencies

A financial pyramid is an unsustainable investment scheme that promises incredibly high returns. The main characteristic of such a scheme is that payments to early participants are made from the funds of new investors. Over time, the influx of newcomers dwindles, and the pyramid collapses. Early participants may make a profit, but the last ones lose their investments.

The Principle of Financial Pyramids

The structure of such projects has a pyramid shape. At the top is the creator, below are the participants. The figure expands at the base, as the number of people increases at each level. The main focus is on attracting new participants. Sometimes the sale of goods or services is used as a disguise. In any case, simply investing is not enough to earn in such a scheme; it requires constantly attracting new people.

Characteristic Signs of Financial Pyramids

Financial pyramids are typically characterized by guaranteed high returns without risks, a lack of official registration with regulators, and a lack of transparency in financial information. They use complex and unclear investment strategies without proper explanations and often have issues with payouts, including constant delays or the use of rare payment systems. Unscrupulous projects are also marked by overall opacity and an unwillingness to provide participants with additional information.

Why cryptocurrencies are different from financial pyramids

Many mistakenly consider cryptocurrencies to be financial pyramids without understanding their technical features. However, this judgment is incorrect. Unlike pyramids, cryptocurrencies do not guarantee returns on investment or high yields. They are fully transparent with open-source code, whereas pyramids hide their inner workings. Cryptocurrency systems allow for the free movement of funds without issues with payments, create equal conditions for all participants instead of advantages for early investors, and operate on a decentralized governance model without a single leadership. The only similarity can be the lack of official registration and regulation, which is explained by the decentralized nature of the technology, not the intent to deceive investors.

Development of cryptocurrencies without centralized management

Cryptocurrencies, unlike financial pyramids, develop without centralized management. For example, the creator of the first cryptocurrency worked anonymously and then disappeared, handing over the development to the community. Changes in the system are impossible without the consent of the majority of network participants.

Thus, although cryptocurrencies have some external similarities with financial pyramids, their fundamental principles and mechanisms of operation are radically different. Transparency, decentralization, and the absence of income guarantees make cryptocurrencies a fundamentally different phenomenon than classic Ponzi schemes.