Ponzi and pyramid schemes: why most people always lose money in the end

Many people think of getting rich when they see cryptocurrencies, but what really makes people lose money is often not market fluctuations, but stepping into a Ponzi or pyramid scheme. This type of scam has been around long before crypto, but the anonymity and global nature of cryptocurrencies make it easier for scammers to replay the same script in a different shell. Let’s break down the Ponzi scheme and the pyramid scheme. The key data will be marked as is to facilitate your comparison and identification in the future.

Ponzi scheme: the "profit" you get is actually someone else's principal

The Ponzi scheme takes its name from Charles Ponzi, an Italian con man who became famous in North America in the early 1920s. His scam ran for more than a year and defrauded hundreds of people. The core logic is: the returns paid to early investors actually come from new investors' money, not real business income. Let’s take a basic scenario: A promoter charges investors $1,000 and promises a 10% return after 90 days. Before 90 days were up, the promoter found two new investors and used their money to pay the first investor $1,100. The first investor is encouraged to keep investing, and more new people are required to join each round. When new money cannot be received, the market collapses and the promoter runs away with the remaining funds. The key feature is deception: participants believe returns come from legitimate investments, when they actually come from people who come later.

Pyramid scam: not selling products, only selling “qualifications to attract people”

Pyramid schemes derive their primary revenue from recruiting new members, not from real products or services. Participants pay money to join and earn commissions by pulling people in, and those who are recruited have to continue to pull people. For example: The promoter gives Alice and Bob each the opportunity to spend $1,000 to purchase distribution rights. They can then sell the same rights to others and earn $500 for each person they recruit. Alice and Bob each have to recruit two talents to recoup their losses, and new entrants also face the same pressure. Mathematically, this structure is bound to fail: the number of people needed to maintain the plate grows exponentially, while potential recruits are limited. When there is no one left to pull, the plate collapses and most people at the bottom lose money. Some pyramids will disguise themselves as multi-level marketing (MLM). Formal MLM does rely on real product sales for revenue, but pyramid structures are illegal in most jurisdictions because they are designed to allow early entrants to make money from latecomers.

Similarities and key differences

Both are financial frauds, both promise high returns, and both require new people to constantly bring in money to maintain. In the end, most of them collapse, most participants lose money, and there are usually no real products or services that generate value. The difference is: in Ponzi, participants are passive investors, thinking that returns come from serious business; in pyramid, participants must actively recruit people and earn commissions from the people they recruit. Ponzi is often dressed up as an investment management service, and pyramids are often dressed up as business or Internet marketing opportunities. Participants in a Ponzi may not be aware of others, and the hierarchical structure of the pyramid is usually visible.

Version in the encryption circle

There have been many fraud cases in the crypto industry over the years. One of the most widely cited suspected cases is OneCoin, which reportedly raised more than $25 billion from global participants, and law enforcement agencies in multiple countries are pursuing accountability for those involved. Founder Ruja Ignatova has been on the run since 2017 and was still on the wanted list as of 2025. Another case was the JPEX exchange fraud in Hong Kong in 2023, which affected more than 2,000 people and involved more than $180 million. BitConnect is also an oft-cited case, as it collapsed in 2018 after regulators issued a cease-and-desist order and many participants suffered heavy losses. In addition, scams in the crypto community often appear in the form of high-yield investment plans (HYIPs), fake staking platforms, and fraudulent token issuances. There is also a related routine called rug pull, in which the project team takes away investor funds after creating heat. There are also more and more DeFi scams, with scammers taking advantage of smart contract vulnerabilities or simply creating fake projects. Starting in 2024, regulatory and research agencies also discovered that AI tools were used to generate promotional materials, fake user testimonials, and realistic fake white papers to make fake projects look more credible, making independent verification even more important.

How to protect yourself

Don't believe any projects that promise high returns, low risks, and guaranteed profits. If they sound too good to be true, they are most likely to be fake. Verify the identity of the seller first. Regular financial advisors, brokers or platforms should be registered with relevant regulatory agencies. Don’t invest in something you don’t understand. Regular projects usually have clear and verifiable documents explaining where the benefits come from. Be wary of unknown invitations. Scammers often solicit people through social media, private messages and trusted acquaintances. Asking to see registration information and being vague or evasive is a warning. If you suspect that you have encountered a Ponzi or pyramid scheme, stop investing money, do not involve others, keep chat records, receipts and account statements, and report it to the local financial regulatory authorities. If you are comparing plans with rebates, VIP discounts or passive income, you should also ask clearly about the costs of handling fees, exit conditions, fund custody, and whether the rebate ratio comes from real trading volume. Don't ignore the underlying risks just because the rebates are high. These are just qualitative reminders, you have to verify the specific numbers with the platform yourself.

The essence of these routines is not new, they are just disguised as encryption. Remember the main thread: Ponzi depends on whether the source of income is real, and pyramid depends on whether the income mainly comes from attracting people. If you don't understand these two points, don't spend money yet.

Reference: Binance Academy https://academy.binance.com/en/articles/pyramid-and-ponzi-schemes

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