A pyramid scheme is a fraudulent investment option promising unrealistic returns to investors from non-existent investments. In pyramid schemes, existing investors are paid with money from new investors. If there are no new investors, the scheme collapses.
Pyramid schemes continue to wreak havoc in the financial industry, with regulators constantly issuing warnings. Those behind such schemes dupe new investors with high returns and often use asset classes that people usually need to familiarize themselves with.
Bitcoin is a relatively new asset class. Its rising popularity is a breeding ground for fraudsters looking to dupe naïve investors.
The rise in scams and frauds around Bitcoin and cryptocurrencies, in general, has led to the misapprehension of BTC being a pyramid scheme.
Jamie Dimon, the CEO of US banking giant JPMorgan, once alluded to Bitcoin being a “pyramid scheme” and a “fraud.”
However, is there any truth to Dimon’s words? Is Bitcoin a pyramid scheme or a legitimate investment?
In this article, we take an in-depth look into the legitimacy of the claims, labeling the king of cryptocurrencies a pyramid scheme.
Understanding Pyramid Schemes
A pyramid scheme channels money from new investors to pay out existing investors. Pyramid schemes rely on the availability of new participants. If no more money comes from new investors, the whole scheme collapses.
Pyramid schemes do not have actual products or services they sell. However, new investors are often lured with a non-existent product.
Usually, when a pyramid scheme dies, those who entered earlier walk away with loads of money, while those who joined later count losses.
Features of a pyramid scheme
A weighty number of financial products are disguised as pyramid schemes. Here are the common traits of a pyramid scheme:
- No actual product or service
- Promises of lucrative returns within a short time
- You have to give out a certain amount of money to join
- Demands to recruit new members
- No financial figures
How to differentiate between pyramid schemes from legitimate investments
One factor that differentiates between pyramid schemes and legitimate investments is product. Legitimate investments have quality products and services, while pyramid schemes emphasize recruitment with no clear product or service.
The compensation structures of legitimate companies are also transparent and publicly available. However, with pyramid schemes, the compensation structure is opaque and promises high returns from new recruitments.
Legitimate investments are also regulated in the jurisdictions where they operate, which differs from pyramid schemes that lack proper legal documentation.
You should also check a company’s track record. Legitimate investments have a long track record of success and positive reviews, while pyramid schemes need a proven track record, and you might notice complaints from past investors.
The Basics of Bitcoin – Why Bitcoin is not a Pyramid Scheme
Bitcoin launched in 2009. Its history and creation by the pseudonymous Satoshi Nakamoto is shrouded in mystery. While Bitcoin is over a decade old, with its market capitalization surpassing $1 trillion, few traditional investors understand it.
Bitcoin launched as a superior alternative to fiat currency. It relies on blockchain technology and a decentralized public ledger to keep transactions secure and anonymous.
Transactions on the Bitcoin blockchain are verified through mining. Mining is also the process through which new BTC enters circulation.
Distinguishing Bitcoin from Pyramid Schemes
Cryptocurrencies are often associated with fraudulent schemes and scams. While this is sometimes the case, Bitcoin as an asset is not a pyramid scheme.
Bitcoin has a robust, transparent, and innovative technology backing it. Moreover, Bitcoin does not have a central entity or person controlling it. It runs using a trustless and transparent network relying on computer nodes attached to the network.
The reason why Bitcoin is often linked to pyramid schemes is price volatility. Bitcoin’s price can change several times in one day. However, these price changes depend solely on the forces of demand and supply.
Dispelling the Pyramid Scheme Myth Around Bitcoin
Many features distinguish Bitcoin from pyramid schemes:
Lack of a central authority
Bitcoin operates using a decentralized model. Bitcoin’s decentralized nature ensures there is no single controlling individual or entity. Furthermore, the Bitcoin protocol is open source, allowing everyone to participate in its development. Anyone can also become a Bitcoin miner.
Bitcoin relies on its decentralized blockchain technology. Bitcoin’s decentralized nature makes it a superior alternative to traditional financial systems in cross-border payments.
There is also no hierarchy with Bitcoin. Anyone can buy Bitcoin, and despite the amount of Bitcoin one owns, they will not have a superior position to make decisions on the network.
Transactions are transparent
Transactions on the Bitcoin blockchain are transparent as they rely on distributed ledger technology. Every transaction done on the Bitcoin blockchain is available for everyone on the network to see. This transparent nature makes it easy to trace fraudulent transactions.
The transparent nature of Bitcoin dispels the myth of it being a pyramid scheme. Pyramid schemes are often shrouded in secrecy, with no records of transactions.
Bitcoin has no emphasis on recruitment
Bitcoin is not reliant on new investors to exist. There is no reward or guaranteed return when buying Bitcoin. Buying Bitcoin is like investing in a traditional asset class like stocks. You only get returns if the price appreciates.
Refrain from trusting people who tell you they know how to make money easily with Bitcoin. Unlike a pyramid scheme where you give another person money to invest for you, with Bitcoin, you have to go to an exchange, buy Bitcoin, and hold it for yourself in a wallet.
Evolution of Bitcoin and Regulatory Scrutiny
Bitcoin emerged in 2009. During its early days, only some understood it, with coins being given out for free to create awareness. Bitcoin has emerged as a top-performing asset in over a decade, reaching an all-time high of $73,000 in 2024.
Regulatory frameworks still need to catch up with Bitcoin’s rapid growth. Many countries are still working towards having a clear regulatory framework for cryptocurrencies. This lack of regulatory clarity has often made competing against traditional assets like stocks challenging for the sector.
Several pro-Bitcoin US legislators, such as Senator Cynthia Lummis, have often called out regulators for regulating BTC through enforcement.
The lack of a solid legal framework has also seen a significant rise in scams, with the Elicit Crypto Ecosystem Report showing that at least $7.8 billion was siphoned from investors in 222 through scams.
Europe is leading crypto regulations with the Markets in Crypto Assets (MiCA) framework. Some countries, like China, have imposed a total ban on cryptocurrencies, while others, like India, are suppressing crypto activities with high taxes and a lack of clear regulations.
Boosting Education and Awareness Around Bitcoin
Bitcoin, like any other investment, is risky. However, investing in Bitcoin is advisable for people with a high-risk appetite because of price volatility. While returns can be extensive, the losses can be worse.
Most people fail to understand the volatile nature of cryptocurrencies, hence the sector’s association with Ponzi schemes. Market forces drive Bitcoin prices. When demand and market sentiment is positive, the price shoots up, and when demand drops, the price dips.
The Department of Justice arrested two individuals in a $25 million cryptocurrency Ponzi scheme in December last year. However, the details of the charges help differentiate between Ponzi schemes and legitimate investments.
The two individuals solicited money from investors, promising to invest in cryptocurrencies to generate high returns. The nature of the arrangement depicts a Ponzi scheme due to the promise of high rewards and the existence of a non-existent investment program.
To invest in Bitcoin, you do not have to give your money to anyone. You will need a cryptocurrency exchange, which operates like a brokerage platform, and buy Bitcoin. Afterward, you can hold your Bitcoin in a hardware or software wallet to sell later.
Criticisms and Concerns Around Bitcoin
There have been legitimate concerns around Bitcoin. One of the concerns is price volatility, where the price changes by huge margins unexpectedly. Bitcoin is a high-risk asset, only suitable for investors with a high-risk appetite.
Another concern is the lack of consumer protection due to regulatory uncertainty. Many regulators globally have yet to formulate a clear regulatory framework around Bitcoin. This poses a danger to consumers using cryptocurrency exchanges.
The challenges around Bitcoin, like price volatility and lack of clear regulations, create the need for investor awareness. Before investing in Bitcoin, research and assess whether you can accommodate the risk.
Bitcoin’s Structure Differs from That of Ponzi Schemes
One of history’s most popular Ponzi schemes is the Bernie Madoff scheme that started in the early 1980s.
Madoff lured investors by promising them huge returns with minimal risk. However, investors were investing in something non-existent as money from new investors was going to the existing investors.
The scheme collapsed in 2009, with investors losing between $65 billion and $74 billion. Madoff was sentenced to 150 years in prison, where he died in 2021.
Looking at the Madoff scheme, its characteristics differ from those of Bitcoin. Bitcoin does not offer any guarantees of rewards or returns after investing. It would be best if you were always wary of people claiming they can help you make huge returns with Bitcoin.
Moreover, Bitcoin does not emphasize recruiting new people like the Madoff scheme. Bitcoin is backed by blockchain technology. It is not controlled by a single individual or entity, making it the opposite of a Ponzi scheme.
In Conclusion
Bitcoin is the total opposite of a Ponzi scheme. It does not depend on a hierarchy of people as it is decentralized. While Ponzi schemes lure investors with the promise of high returns, Bitcoin does not offer any guaranteed rewards.
Before investing in Bitcoin, investors must understand what it entails. The underlying blockchain technology backs Bitcoin. Bitcoin’s price is also volatile, making it a high-risk investment.
Be wary of people soliciting money from you to invest in Bitcoin on your behalf and give you guaranteed returns. If you want to invest in Bitcoin, buy through an exchange and self-custody in a wallet to avoid falling victim to scams.
