Are Cryptocurrencies Like Bitcoin A Pyramid Scheme?
The best answer to this tricky question.
Do you think cryptocurrencies are a pyramid scheme? You’re not alone — we have all seen the headlines that have associated Bitcoin with members of the cryptocurrency community being arrested for running pyramid schemes. However, if you take a closer look at these reports, it is clear that cryptocurrency isn’t the problem — rather it is the people involved in promoting it who are.
In some ways, yes.
Cryptocurrencies, such as Bitcoin and Ethereum, are a relatively new and elusive financial phenomenon. They started in early 2009 with the launch of Bitcoin, but it wasn’t until 2013, when the first major cryptocurrency exchange, Mt. Gox, was hacked and collapsed, that they gained mainstream attention.
But there has always been skepticism surrounding cryptocurrencies. Some people are quick to call them pyramid schemes because they require new members to invest in order to join. This is true, but not because it’s illegal to do so.
Pyramid schemes are illegal because participants must be recruited for an investment that usually doesn’t pay off for a long time. In many cases, the money invested does not return at all. It’s this type of promise that makes cryptocurrecies a pyramid scheme rather than an investment vehicle like a stock or bond — these investments have potential returns based on how successful they are.
But in other ways, no.
There’s a lot of confusion about whether or not cryptocurrencies are pyramid schemes. In my experience, the answer is yes and no.
Of course, cryptocurrency isn’t a pyramid scheme in the traditional sense, because it doesn’t require any kind of payment to join. But there are some other similarities. Like a pyramid scheme — but unlike most legitimate business opportunities — you don’t have to pay a fee to join in order to make money; people just buy and sell for profit.
Like a pyramid scheme — but unlike most legitimate business opportunities — the more people who buy into it, the more valuable it gets. It can be hard to tell if you’re really following a legitimate opportunity (one where you’ll get paid for selling) or if you’re just joining to make money off other people’s investments.
So while there are some clear differences between cryptocurrency and pyramid schemes, many people see them as the same thing and don’t understand why they can’t just join both at once. So when I hear that someone has joined their friend in joining both an investment club and a pyramid scheme at the same time, I know they’re probably trying to make money on someone else’s money.
You see, pyramid schemes promise one thing upfront but give you something entirely different.
There are a lot of different types of schemes out there, and they all have their own pros and cons. One of the most popular is pyramid schemes, which promise huge riches upfront but give you very little in return. They’re essentially Ponzi schemes, where you get paid to recruit other people into the scheme and get paid for yourself as you recruit others.
Pyramid schemes are a big problem in the U.S. and abroad, but Bitcoin has been accused of being a pyramid scheme before. Charles Hoskinson, a co-founder of Ethereum and one of the most prominent figures in the cryptocurrency world, called Bitcoin a pyramid scheme when he was still involved with Ethereum at its early days. He later retracted the statement, calling it an “accident” that he said was due to his lack of knowledge on the subject at the time. The Bitcoin Foundation also shot down allegations that Bitcoin is a pyramid scheme in November 2013 with a blog post titled “Bitcoin is not a Pyramid Scheme”.
Cryptocurrencies may not be pyramid schemes in the strictest sense of the term.
Pyramid schemes have a few characteristics in common. First, they require recruiting new members to generate income for the founders. Second, they may promise high returns on investment for new recruits. And third, those returns may be based on the number of recruits who join, rather than their actual earnings.
Cryptocurrencies aren’t quite as straightforward as that — in most cases, they’re not really pyramid schemes at all.
First, as noted above, it’s hard to argue that cryptocurrencies are pyramid schemes when there’s no clear way to make money off them directly.
Second, there’s usually a limit on the number of cryptocurrencies that can be created or distributed in some way. That limits how much anyone can earn by recruiting new members or by buying and selling coins on an exchange.
Third, while the amount of money a person could make by recruiting a large number of people might seem to indicate a pyramid scheme is involved, this isn’t always the case. One big difference between pyramid schemes and cryptocurrencies is that short-term recruitment only occurs for new coins that have been released with more value than their original value (usually called “air drops” or “initial coin offerings” — ICOs).
In a nutshell
Everybody wants to make money by investing in cryptocurrencies but every which way of making a profit is usually just different ways of risking your investment. Pyramid schemes have existed for decades, and have defrauded people out of their money for centuries. They put a glossy coat over something that’s dirty, which is how most pyramid schemes come across. So if you’re asking yourself whether or not cryptocurrencies are a pyramid scam, the answer is yes, they are – but only in name.