The Difference Between Pyramid & Ponzi Schemes

Just when you thought that Egypt was the only place on earth where pyramids can be found, you’d be surprised at how popular pyramid scams are in your neck of the woods. What’s not to like? Pyramid and Ponzi schemes all involve feeding into the same classic impulses that people the world over find hard to resist-the need to find a low risk guaranteed investment.

People who fall for these scams are not quite the greedy fools their critics paint them out to be. If they lost all that money to fraudulent investment scams, it means they were at least smart enough to save or borrow that money. These people got fooled because they were smart enough to know that they needed to put their money somewhere other than a bank. Simply put, parking your cash in the bank is a sucker’s bet-your money will get eaten up by inflation as time goes by. You need to beat inflation and factor in interest income taxes for your money to take care of you in the future.

These victims are aware of banks’ shortcomings when it comes to preserving the value of their money. That’s why pyramid and ponzi schemes continue to claim victims the world over. They manage to snag people who are looking for better returns on their money but who refuse to place their cash in more reputable yet risky investment vehicles. Read the guide below to help you figure out the difference between pyramid and ponzi schemes. By figuring out how they operate, you can learn how to avoid them.

Operational Similarities

Just because a make money quick scheme is put on the Internet does not magically transform it from a scam to a legitimate money-making opportunity. In fact, the hallmarks of traditional ponzi scams and pyramid schemes don’t differ all that much from their online cousins.

First, they both offer the ‘opportunity’ to earn an astronomical amount of money. Second, their advertising material always highlights two key components-the ease of making money and the ‘fact’ that anyone can do it. Third, both pyramid scams and ponzi schemes rely on people using their personal spheres of influence to get more suckers into the deal. Finally, and the saddest commonality among the two scam methods, both end up collapsing when the supply of new investors cannot support the huge amount of money due to earlier investors.

The Main Difference Between The Two Types Of Schemes

The biggest difference between a ponzi scheme and a pyramid scam is the fact that the pyramid scam requires participants to actively recruit new people into the scam. These new people are the ‘down line’ of the recruiters. The ‘fees’ charged to the new people fund the recruiters. The new people are then motivated to find another tier of suckers so they can get their own money back. And on and on it goes.

Pyramid scams don’t use a real product. They use ‘membership fees’ to get down lines going. That’s the main difference between illegal and fraudulent pyramid schemes and multilevel product marketing-the presence of real products. Ponzi scams, on the other hand, don’t rely on a down line system. The operator does the recruitment himself and merely uses earlier investors as ‘testimonials’ or ‘models’ of how effective the investment scam is.

Similar Impulses

Considering the fact that pyramid schemes and ponzi scams arise, peak, and collapse all the time, why do people keep falling for them. The reason is simple and obvious: people are always looking for a way to make a huge amount of money very quickly with ‘no risk.’ I put the last condition in quotes because investing your money in a ponzi scheme or pyramid scam is the riskiest investment you’ll ever make.

All of these scams fail eventually, that’s why they are extremely risky. The risk of loss is as astronomical as their claimed rates of return. Still, people get suckered by the siren call of ‘almost no risk’ or ‘guaranteed return.’ When paired with the fact that someone they trust or admire is also an ‘investor,’ they throw common sense aside and end up getting victimized. You can lose your investment and need to take out a payday loanĀ to pay your bills if you’re not careful.

Anum

Anum Yoon is the founder and editor of Current on Currency. She loves all things personal finance, which is why you'll find her work all over the PF blogosphere.

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