Pyramid Scheme Meaning

A pyramid scheme is a fraudulent investment model based on recruiting an ever-increasing number of investors. Initial promoters recruit investors, who in turn recruit more investors.

The scheme is called a pyramid because at each level, the number of participants increases. Unlike legitimate businesses, there is usually no real product or service being sold; the returns for older investors are paid using the capital from new recruits.In the crypto industry, many scams disguised as high-yield investment programs (HYIPs) or multi-level marketing (MLM) crypto projects are actually pyramid schemes.

They often promise "guaranteed returns" of 1% or more per day. Eventually, the recruitment slows down, the organizers disappear with the remaining funds, and the pyramid collapses, leaving the majority of participants with a total loss.Technically, these schemes are distinguished from Ponzi schemes by the fact that the victims are actively involved in the recruitment.

While a Ponzi scheme involves a central "manager" who fakes the returns, a pyramid scheme requires the victims to become the recruiters. Both are unsustainable and illegal.

Due diligence on the source of a project's yield is the best defense against these schemes; if the yield comes solely from new entrants rather than economic activity, it is a red flag.