A pyramid scheme (or Ponzi scheme) is
a fraudulent system of making money which requires an endless stream of
recruits for success. It is a scam because it promises people
outrageous returns or payments, and pays them with money from new investors
or members instead of money generated from the business. Since all pyramid
schemes are not sustainable, they always collapse and
people who join later always lose money.
A pyramid scheme is like a game of musical chairs. The last one to sit
loses, although on a grander scale. Generally the people who lose are
unsophisticated and the least able to afford the luxury of giving away their
hard earned money.
The result of all these schemes is inevitable: at
best, a few people walk away with a lot of money,
while most recruits lose whatever money they put
into the scheme. In fact, the only way anybody can
make money through a pyramid scheme or chain letter
is if other people are defrauded into giving money
upon a promise of getting something in return when
it will be impossible for them to get anything at
all in return. That is to say, in plain English,
these schemes always constitute fraud. They use
deception to get money. That is why they are
illegal. They are not illegal because they involve
recruiting people to recruit other people to recruit
other people. That is perfectly legal and is done to
some degree in many legitimate businesses. They are
not illegal because they involve giving money to
people. It is perfectly legal to give money to
people. They are illegal because they involve
deceiving people in order to get money from them:
that is the legal meaning of fraud.
The scheme is named after Charles
Ponzi, who became notorious for using such fraudulent investment operation. Ponzi did not invent the scheme, but his operation took in so much
money that it was the first to become known throughout the United States. In
1920's, Charles promised clients a 50% profit within 45 days, or 100% profit
within 90 days. People were mortgaging their homes and investing their life
savings. In less than 200 days, the scheme collapsed under its own
weight, leaving nearly 40,000 "investors" with heavy losses.
Ponzi programs always pretend that they use the investors money to invest
in money exchange (FOREX) and stock market and then will pay the investors through
the profit they make but this is false because there is no investment that
can make such a huge profit that enables the Ponzi programs to pay the
investors. There are a lot of programs with different names that are Ponzi
scheme. HYIP and
Surfing programs are the most famous ones.
A matrix scheme is another variant of a pyramid
scheme. People give money to be added to a
waiting list, waiting for a larger prize to be
received at the end. Once a person has signed
on for a matrix scheme, his or her name is added to
the bottom of a waiting list. To move up by
one level, the person must recruit enough members to
fill all the positions in the matrix. Matrix
Plans limit the width of each level in a
distributor's group, forcing strong distributors to
pile ("spillover") their recruits over people who
did not sponsor them.
To camouflage the pyramid scheme, people may get
a small token for their money, such as chocolate bar
for $30 Dollars. Besides the fact that the
item being sold is overpriced, the other problem is
that 99% of the people entering a matrix scheme will
never get anything except that original item.
Since matrix schemes follow the same laws of
geometric progression as pyramids, they are
subsequently as doomed to collapse.
Binary compensation plans have become the darling
of startup multi-level marketing (MLM)
companies. There is a an appeal to the binary compensation plans for
newcomers to the field of network marketing. Newbies are sold on the
idea that their upline can only place people in one of two places and thus a
new person's business will be "fed" from above.
Binary means 2. Thus, each sponsor can have only 2 distributors in
their immediate downline. The Binary Compensation is a specific case of a
Matrix Scheme having a width of two. The downline is the term used for those recruited
distributors who are placed beneath you. The Sponsor is the
distributor who is immediately above you. However, the number of levels in
the downline is infinite in binary compensation plans. Binary MLM
compensation plans pay out a percentage based on the total volume on the
lesser (least profitable) leg. You do not get paid on your greater leg.
In a binary compensation plan, the distributor must “balance” their
downline. Say your downline is balanced and you enroll Bob on your
left leg. Bob's recruiting takes off and he is generating a volume worth
six figures per month. Well, you receive nothing from Bob's
sales until you recruit the equivalent sales volume to your right leg.
It is already difficult to recruit a new distributor, never mind recruiting
an outstanding one. Worse, your compensation may diminish because of
attrition. If you are not constantly recruiting on your right leg,
then you may end up with a zero commission, despite Bob's sales breaking new
The recruiting pyramid scheme is quite clear.
After working for several months, most distributors
are still unable to recoup their initial cost (never
mind making any money), and because of this, they
drop out. In order for the top distributors to
keep making their millions, they must continually
recruit new distributors to replace those who drop
out. Any failure in recruiting results in a
collapse of the downline. The
truth is the majority (at least 99%) of distributors are left holding the
bag, while the top distributors make all the money (by defrauding their
Why Pyramid Schemes are Popular?
Pyramid schemes are popular because they appeal to greedy people... and greed can do
wonders to a person's thinking. For a person desiring to make a lot of money
from a small investment in a short amount of time, wishful
thinking often takes over where
critical thinking should step in. Wishes become facts. Skeptics become
idiots for not getting on board. Desires become reality. Asking questions
seems rude and unfriendly. Scam artists know how greed works and all it
takes is one con man to get the thing started.
With the odds so stacked against a person, why would one gamble on a
pyramid scheme? Greed is only part of the answer. Most pyramid people don't
envision themselves anywhere near the bottom layer of the pyramid. Even the
most greedy person on the planet would probably see that if one is near the
bottom layer of recruits it will be very hard to get new recruits. They have
to see themselves near the top in order to envision the immense wealth from
minimal effort that is going to come their way.