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Definition of the Ponzi pyramid: what to know
The Ponzi pyramid is a fraudulent financial assembly which is based on the collection of money with investors seduced by very high yields. At first glance, it looks like a miraculous opportunity: an investment that seems without risk and offers fast gains. In reality, there is no real economic activity generating these promised benefits. The interests distributed to the first participants come only from the money provided by the new entrants. When the recruits chain is dried up, the system collapses and most investors lose all their capital.
In the lines that follow, you will find a clear analysis to understand why this pyramid system remains one of the most dangerous scams in the finance sector, especially in the world of cryptocurrencies, still young.
Table of contents
Ponzi pyramid Definition: Origin and central characteristic
Basically, we find Charles Ponzi, an Italian immigrant installed in the United States at the beginning of the 20th century. He popularized this process around 1919-1920. The idea is simple: attracting people by guaranteeing attractive yields, much superior to what legitimate investments offer. Ponzi claimed, for example, to offer 50 % yield in 45 days.
The articulation of this type of pyramid scam is summed up as follows: the "dividends" paid to old investors come from the deposits of the new subscribers. As long as the base of the pyramid is supplied, the system can last. This is what some call "the financial cavalry", that is to say an incessant flow of external capital to maintain the illusion that everything is fine.
The myth of guaranteed performance
In any ponzi pyramid worthy of the name, there is a high performance promise, often by associating it with a revolutionary pseudo-concept: a miracle product, a trading , or a start-up launched by "geniuses of finance".
However, no solid investment can offer fixed gains without risk, especially when the praised percentages challenge the logic of the market. If the promoter of an investment ensures, for example, 20 % of monthly profits without any volatility, you must immediately beware. In the regulated markets, such constant performance is almost impossible to maintain in the long term.
The role of recruitment
The other central characteristic is that the structure depends on constant expansion. It takes new sums to pay the interests of previous investors. illegitimate financing system therefore relies on exponential growth. Everyone is encouraged to recruit other people in exchange for premiums or commissions, until the flow of new arrivals run out of steam.
Once growth stops or slows down, returns on investment can no longer be honored. Pares holders seek to withdraw their earnings, and discover a financial chasm: the crook can no longer reimburse everyone. We are then witnessing the collapse of the pyramid.
Concrete illustration with Bernard Madoff
The case Bernard Madoff, sentenced in 2009, is the most illustrative of all. Former president of Nasdaq, Madoff was considered a respectable investor. He made his clients shing in his customers supposedly regular and high yields, not very correlated with the stock markets. Officially, Madoff ensured capital in sophisticated strategies. In reality, none of the funds was truly invested. The earnings received by the first savers came from subsequent payments from other subscribers.
According to the SEC (Securities and Exchange Commission) , the damage exceeds $ 17 billion in invested capital. When his clients asked for the massive withdrawal of their assets during the 2008 financial crisis, he could not face these liquidity outings, revealing the scam.
Ponzi Pyramid Definition: Indices to locate a pyramid system
To avoid falling into the trap, it is essential to know the warning signals. Here are several keywords and indicators to keep in mind as an individual or potential investor:- Promise of a disproportionate return: often monthly or annual interests, far beyond the market standard.
- Risk presented as nonexistent: reassuring discourse, where you are guaranteed that placement is "perfectly safe".
- Lack of transparency: no credible details on how funds are invested or reinvested.
- Sponsorship system: Strong incentive to recruit referrals, with commissions on their contributions.
- Difficulties or delays in withdrawal: you are provided by excuses each time you are looking to remove your earnings.
The legal framework in France and elsewhere
In France, the pyramids of Ponzi are considered to be fraudulent financial montages, punished by law. L'Article L122-15 of the Consumer Code Prohibits pyramidal sales systems. It is not uncommon for the Autorité des Marchés Financiers (AMF) or the Directorate General for Competition, Consumption and the Repression of Frauds (DGCCRF) to issue alerts on investment proposals with questionable looks. In the United States, this is the DRY Who often takes over from investigations, while in the European Union, the European Financial Markets Author (ESMA) also closely monitors these chain fraud.Pyramid of Ponzi Definition and link with cryptocurrencies
The world of decentralized finance (Challenge) and cryptocurrencies have experienced an explosion of offers in recent years. In this new sector, some crooks have seized the opportunity to reply the pyramid scam by exploiting the ignorance of technology blockchain at many investors.A young and little regulated terrain
THE cryptocurrencies are sometimes perceived as a digital farm: young technology, rules still blurred in certain jurisdictions and a fascination for projects promising exponential yields. This situation can promote Financial Cavalleries masked under allegedly "revolutionary" protocols. In reality, real technological innovations in cryptocurrencies (smart contracts, public blockchains, proof-of-stake consensus, etc.) are not pyramidal systems. But nothing prevents a fraudster from launching a fictitious token, praising fixed profits of 10 % or 15 % per month, and thus attracting a large number of novices.Examples in the crypto universe
Several projects have become sadly famous for their patterns inspired by the Ponzi pyramid .
- BitConnect (2016-2018): This platform proposed a token (BCC) supposed to generate a daily profit thanks to a mysterious “trading robot”. In reality, the former holders were paid thanks to the new entrants, to the Krach of BCC. Losses are estimated at more than $ 3 billion.
- Onecoin (2014-2019): presented as "Bitcoin Killer", the project did not even have a real blockchain. The affiliate revenues came directly from successive recruitments.
- PlusToken (2018-2019): claimed to offer monthly interest located between 10 % and 30 %. At the time of the fall, millions of investors, especially in Asia, lost more than $ 2 billion.
In all these cases, unrealistic yields masked a simple redistribution game. The system was holding up as the new subscribers flocked.
Why is the crypto sector so conducive to Ponzi's pyramids?
There are several reasons:
- Lack of education: Many individuals embark on cryptos without understanding the concepts of finance or markets.
- Lack of safeguards: even if some countries strengthen the regulations, there is a legal emptiness in other areas.
- Decentralized character: the blockchain allows transactions to be made without going through a central authority. This freedom, if it is an asset, also facilitates the task of the crooks which bypass conventional procedures.
Why bitcoin and cryptocurrencies themselves do not correct the definition of a pyramid of Ponzi
It is crucial to distinguish technology from its malicious uses. Cryptocurrencies are sometimes wrongly considered to be soutically speculative project without foundations and assimilable to a pyramid of Ponzi. The Bitcoin protocol, for example, does not promise any guaranteed return. It works on a peer-to-peer network (P2P), without central entity. Everything that happens on the blockchain is public and verifiable.
No unique "organizer" for Bitcoin
In a real pyramid of Ponzi , there is always an operator, a group or a company controlling the distribution of the alleged benefits. For Bitcoin, it's different: no one can handle it to feed a pyramid system. Its monetary creation (mining) is transparent and follows known rules (reduction by two of the mining award approximately every four years, up to 21 million BTC maximum).
In other words, Bitcoin is not an investment product administered by a third party. It is a digital currency whose value evolves according to supply and demand on the markets. There is no pyramidal structure that pays for former participants with the money from newcomers.
Lack of promise of fixed yields
Unlike Ponzi systems, the Bitcoin protocol does not guarantee capital gains. Investing in the BTC has a risk. The course sometimes fluctuates strongly according to the economic context, political decisions, large bearers or speculation.
Thus, if someone offers you to buy bitcoin with the assurance of a stable monthly interest, it is not Bitcoin itself which is in question, but the structure of the offer set up through. This nuance is essential not to tax the cryptocurrency of Pyramid de Ponzi .
Legitimate uses and real transfers
In addition to its speculative use, Bitcoin serves as a means of payment (often faster and cheaper than certain traditional banking systems to send money abroad), a reserve of potential value and even warranty on certain respectable deffi platforms. The economy that forms around the BTC is far from being a wave of funds between naive investors. There is a plurality of industries (Fintech, online games, NFT , etc.) which use the BTC as an underlying active or as a means of transaction.
Ponzi Pyramid Definition: How to protect yourself and avoid scams
Now that you know the definition of a Ponzi pyramid and its derivatives in the crypto sector, it's time to see how you can protect yourself from these financial scams.
Inquire and verify the legitimacy of the projects
There are several ways to form your own opinion:
- Read the White Paper (Whitepaper): A real Crypto project often has a technical document explaining how it creates value, without being content with making vague promises.
- Control the reputation of the founders: are these verifiable and recognized personalities, or unreachable pseudonyms?
- Examine the official website: is there an identified team, a legal register, or does everything seem to come out of nowhere?
Avoid stable performance promises
Any project which praises a “guaranteed” income is suspect, especially if this income goes far beyond what the traditional market offers on risk -free investments (booklets, state bonds). On crypto loan platforms, there are variable yields, sometimes higher than in classical finance, but they fluctuate and include clear risks, linked to the volatility of digital assets, smart contract or potential counterpart defects.
Analyze financial mechanics
By studying the way in which the profits are supposed to be generated, you can quickly locate the signals of a scam . If the only source of income is the money from the entrants, it is a pyramid system. On the other hand, if concrete products or services generate a cash flow (transaction costs, NFT sale, placement in liquidity pools, etc.), there is an authentic economic activity at the base.
Pyramid of Ponzi Definition: The consequences for the victims
An individual trapped in a Ponzi assembly can lose everything, savings, retirement savings ... The moral aspect is heavy: feeling of shame, guilt, anxiety, etc. On the macroeconomic level, these fraudulent investment systems can generate considerable damage, with billions of dollars or stolen euros.
Once the scam has been revealed, legal proceedings can lead to confiscations of assets, but it is rare that all of the missing amounts can be returned to the victims.
Legal procedures and appeal
If you think you are the victim of a Ponzi pyramid , it is preferable to:
- File a complaint with the police or the gendarmerie.
- Contact AMF or competent authority in your country.
- Keep all the evidence: receipt receipts, emails, screenshots.
The courts can heavily sanction those responsible for these scams, but the procedure can take time. Hence the importance of acting quickly and cooperating with the authorities.
Ponzi Pyramid Definition: What to remember
A pyramid of Ponzi is an illegal financial arrangement whose operation is based on the money of new entrants to remunerate the previous ones. Despite an apparent profitability, it is always a dangerous game with a negative sum for the victims. To date, there are many examples of pyramid diagrams that have caused fortunes to be lost, both in traditional and in the crypto.
The fundamental distinction between a crypto protocol and fraud
Bitcoin and the big public blockchains are not pyramids from Ponzi . They do not distribute fixed yields, are not based on the recruitment of new members and do not have a central structure manipulating financial flows.
Some projects exploit the poor understanding of crypto technologies to build very sophisticated scam systems, sometimes hidden behind a technical vocabulary.
The vigilance of regulators and investors
Even if decentralized finance is built outside the usual banking channels, regulatory organizations are starting to monitor Crypto projects more carefully. Registration controls and obligations are being set up in several countries. Repression is sometimes difficult because some protocols are anonymous or hosted in distant jurisdictions. But the movement towards more transparency is engaged.
On your side, you remain the main player in your financial security.
Conclusion on the definition of a Ponzi pyramid
If you were to retain only one idea of the definition of a Ponzi pyramid , it would be the following: the essence of a Ponzi is in the fact that "yields" come only from the funds injected by the new subscribers. No real investment, no tangible product, just a repeat in trompe-l'oeil.
In the cryptocurrency sector, innovation is real and will in depth many sectors in depth. However, the youth of the ecosystem, combined with an incomplete regulatory framework, opens the way to abuse. Certain malicious platforms adopt a pyramidal structure to pocket the money from too confident individuals.
This should not divert you from the interest that cryptos and blockchain can present. Rather, it is a question of developing a responsible approach:
As a last resort, if you come across offers that promise exorbitant feedback, remember the number one principle: the better it is, the more you need to question its viability. The pyramid montages of Ponzi persist because they exploit the desire for easy gain. Appearances can be misleading, and staying vigilant is often the best reflex not to be the next victim of a financial scam.
Investments in cryptocurrencies are risky. Crypternon could not be held responsible, directly or indirectly, for any damage or loss caused following the use of a property or service put forward in this article. Readers must do their own research before undertaking any action and investing only within the limits of their financial capacities. Past performance does not guarantee future results. This article does not constitute an investment advice.
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AMF recommendations. There is no guaranteed high yield, a product with high performance potential implies a high risk. This risk taking must be in line with your project, your investment horizon and your ability to lose part of this savings. Do not invest if you are not ready to lose all or part of your capital .
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Yohan Uzzan
Training engineer, I quickly became interested in the field of finance. Convinced that decentralized finance has a bright future ahead of it, I participate in its democratization by developing Crypternon.
