Pyramid schemes are investment mechanisms which funnel the money put in by new entrants to earlier investors as payments, or ‘returns’ on their investments. The Securities and Exchange Commission of the United States (SEC) defines both Pyramid and Ponzi schemes as forms of financial fraud.
“New investors are inclined to participate in the business, by taking part in profitable projects with minimal or even absent risks. Scammers are trying to attract new members in order to make payments to the previous participants, creating the false impression that they make a profit from the legitimate business.”
Bitcoin has been labelled a scam and a Ponzi scheme by many in the financial industry, including JPMorgan boss Jamie Dimon. But is there any truth to these accusations?
Pyramid schemes operate with a central figure in control sitting at the top. These individuals are the instigators of the scheme and dictate the particulars of how their own one will work. If this authority figure ever disappears, investors will be left with nothing.
Bitcoin is a distributed digital currency, as well as a payment system, built on a peer-to-peer computer network. The system does not have one single authority in control and is not centrally managed. Rather a ledger detailing transactions is distributed to all participants. This means that every computer that produces bitcoins is a member of the system. Every single transaction that has ever taken place is recorded on the blockchain, the distributed ledge, and it acts as an incorruptible authority.
Pyramid schemes promise high returns. Profitability in these pyramids is provided exclusively by the money of new depositors. In order to receive payments, pyramid schemes are required to attract new investors and their money. Funds that have been put into the scheme are not used as investments in other business projects but instead, they are distributed among the older participants. The people running the scam always take a large cut of the new money as well.
Bitcoin’s price is governed solely by its supply and demand. More and more people are looking to invest in cryptocurrencies, A growing demand along with a limited supply ensures that bitcoin’s market value is increasing. This natural growth can be compared to a stock. Bitcoin grows in price as a digital asset, similar to the share price growth of the successful companies.
A scheme is stable only due to the constant influx of new participants and money, from which payments are made to older participants, creating the false impression that they are making a return. A pyramid scheme must attract new investors and cash injections to survive. It can not exist if it is not able to do this. These kinds of scams provide no real value to investors.
Bitcoin does not have any concepts similar to “investors” or “dividends” at all. Platform concepts are based exclusively on an open source code, which is available to users who are making money transfers between their accounts, as well as to the miners who ensure the system’s efficiency, for a fee from the very same system, without the participation of any third party. For bitcoin, being an innovative monetary system, it is important to attract new participants, but not for their fiat money. New members, whether they maintain a current version of blockchain on their computer, or engaged in mining, increase the value of the bitcoin network as a whole.
Whereas pyramid schemes do not produce any real product of value, bitcoin is its own product and is unearthed by the system itself during mining. Bitcoin discovery is limited by the system since new coins are found at a rate which decays by half every four years. All new bitcoins that were obtained by the miners are used as a financial incentive for the system members. Subsequently, miners can transfer part of their bitcoins to the other users of the network as payment for services and goods, or convert them to fiat money. As a result, bitcoin is distributed to the network’s many participants. Cryptocurrency has entered the global financial market, staking its claim due to the high demand it enjoys, alongside more traditional currencies. At the time of publication, cryptocurrency world market capitalisation exceeded $400 billion.
Pyramid schemes will eventually collapse when the investor base stops growing. They are created with the goal of generating income for those who sent it up by defrauding investors. All profits are divided between the initial organisers and the first group of early investors. The collapse usually occurs quickly and is rarely predicted. At some point, a large group of investors will end up with nothing.
The Blockchain concept, which is the underlying infrastructure for almost any cryptocurrency, will survive even in the most difficult situations. This technology will continue its development and can be applied in any field of business around the world. This is a publicly available ledger that can be used for verifiable instant transfers at virtually zero cost.
There are fundamental differences between bitcoin and pyramid schemes. Bitcoin is often mistakenly compared to the pyramids, due to its drastic value increases. But this value is determined by the supply and the demand of the market, with all the information of what bitcoin is available. If the cryptocurrency stops replenishing itself with new participants, it will not collapse. Its value will simply stop growing. Holders of digital coins will lose exactly the same amount of money as ordinary fiat holders would lose on devaluation.