- A pyramid scheme can be defined as a fraudulent way of making money by recruiting investors who bring in more investors.
- The scheme is called a pyramid, largely due to its ever-increasing number of investors, ultimately making the business unsustainable.
- According to a Chainalysis report, in 2021, revenue from illicit activity grew by 82% to US$7.8 billion worth of cryptocurrency stolen from victims.
The cryptocurrency market has established itself as a force to reckon with taking the world by storm. Despite its high volatility and issues related to market manipulation, its adoption is increasing by the day. The global crypto market cap is about US$1.68 trillion, and with this growth, it has become more prone to various Ponzi schemes as well as pyramid schemes, which are to be blamed for duping investors of their precious investments.
Today, many projects’ companies are spending millions for their marketing, it's hard to identify which one is a genuine project or a Ponzi scheme floated to dupe investors.
A pyramid scheme can be defined as a fraudulent way of making money by recruiting investors bringing in more investors. The scheme is called a pyramid, largely due to its ever-increasing number of investors, ultimately making the business unsustainable. The plan looks legitimate and promising to an unassuming investor due to its multi-level marketing ventures.
However, it becomes a pyramid scheme with almost no legitimate sales.
The business model works on so-called profits, which are brought by the subsequent investments that the investors bring in. Many fall prey to such scams, Ponzi schemes, or illicit activities resulting in severe losses. According to a Chainalysis report, illicit activities grew by 82% in 2021, and about US$7.8 billion worth of cryptocurrencies were stolen from investors.
Let's look at four such schemes that have hurt investors and crypto enthusiasts.
3 Biggest Crypto Pyramid Schemes That Have Rocked The Market
DubaiCoin was a form of pyramid scheme that had hit the crypto market last year. In May 2021, the fake crypto coin hit the headlines after it was reported that a UAE-based company named Arabianchain Technology had launched the token.
Soon a new release was sent out that Dubai will get its own central bank digital currency (CBDC) called DubaiCoin (DBIX). The prices of non-existent DBIX soared by over 1,000% within 24 hours of its virtual existence. The Dubai officials immediately cleared the air that it hadn't approved such a token. Later it was proved that it was indeed a scam whose primary aim was to entirely take away savings of a few investors and personal data of several traders and investors.
Image credit: Twitter @DXBMediaOffice (Dubai Media Office)
Brazil's 'New Egypt'
In January 2022, another form of pyramid scheme rocked the crypto market, witnessing a bearish phase. As per a news report by the Associated Press, Brazil's police arrested two men and a woman for robbing millions of their hard-earned money. It was reported that the accused were held with 7 million reais (US$1.3 million) in neatly packed bills in Rio de Janerio.
The detainees were employees of G.A.S. Consulting & Technology, a cryptocurrency investment firm founded by Glaidson Acacio dos Santos. As G.A.S.' revenue rose in Cabo Frio, the resort town that was dubbed as the headquarter of the firm, was called the "New Egypt", and dos Santos was known as the "Bitcoin Pharaoh".
Police said that the company managed to increase her earnings to US$7 billion ($38 billion reais) between 2015 and mid-2021 through a Bitcoin-based Ponzi scheme that promised investors 10% monthly returns. However, things came to a halt when Rio Police seized the money at the helipad of the Insolito Boutique Hotel. This prompted an investigation into dos Santos' business. Later, the federal police raided dos Santos' home and collected 13.8 million reais (US$2.5 million) and arrested him finally.
Image credit: © Tarikvision | Megapixl
This was perhaps the longest-running pyramid scheme of the crypto industry. Onecoin, which was founded by the Bulgarian fraudster Ruja Ignatova, alias Cryptoqueen, managed to lure investors between 2014 and 2019. Dubbed as the Bitcoin killer, the scheme has defrauded investors of a whopping amount of US$5.8 billion.
The scheme modus operandi was members who brought in new members were compensated with cash rewards. This gave them a mirage of a large business venture. However, Onecoin was never a blockchain-based crypto coin, so whatever amount of fake token the investors held was virtually worthless. The U.S. government cracked down the operations and levelled charges against the management.
This was perhaps the largest Ponzi scheme to have hit the market to date. The scam enticed investors using the Chinese messaging app WeChat to assure that they will be able to make 10-30% profit from their investment. The PlusToken managed to gain 3 million investors from countries such as South Korea Japan.
The basic business model focused on its crypto wallet services, and the scammers were able to convince investors that they could substantially increase their earnings if they bought the tokens. But it finally came to an end when in 2019 when the project exited by making over US$3billion. However, the authorities did manage to arrest the leading players. The Chinese government confiscated US$4 billion worth of crypto linked to the scam.
With the crypto market getting bigger and bigger, investors and authorities must be extra vigilant about such pyramid schemes. These examples indicate that illicit market players with evil intentions will take advantage of investors' savings. Still, one should be careful with investments and do in-depth research before making a move.