The sale, exchange and investment of cryptocurrencies has become increasingly popular amongst online investors.
Still, those who run platforms where these investments are made need to ensure their operations are legitimate. They do not want to be accused of operating an illegal pyramid scheme.
What is a pyramid scheme?
A pyramid scheme is an illegal investment arrangement. In pyramid schemes, a person will state they have a great opportunity or product that others can invest in. The person running the scheme would tell potential investors can expect major returns from their investments. Encouraged by this purported success, people invest funds into the scheme.
However, instead of investing the funds in a legitimate business or product, the person running the scheme will use the invested funds to pay off earlier investors and line their pocketbooks.
Eventually, there would be no funds left and the schemers would walk away illicitly richer, while most investors would be left with nothing to show for their investment. Essentially, the investors have been duped out of their money for the profit of the schemers.
Pyramid schemes have moved online
Pyramid schemes have moved online, specifically in the form of cryptocurrency. The basic operations of a crypto pyramid scheme are the same as traditional pyramid schemes. The schemers will state they have a great cryptocurrency trading plan that others can invest in, and they promise significant interest rates on these investments to the benefit of the investor.
People are thus convinced to invest in the plan by purchasing cryptocurrency or lending cryptocurrency they already own. But these funds are used to pay off prior investors rather than being invested in legitimate investment opportunities.
Eventually, the schemers will extract all the funds, and run off. Most of the investors have lost their money, and never made any profit from cryptocurrency.
Those who run online investment platforms need to tread carefully when it comes to cryptocurrency. It is all too easy to slowly move from legitimate investment operations to operating an unlawful pyramid scheme.
The federal government will come down hard on those operating pyramid schemes, whether the schemes are online or not, and one can expect to suffer significant fines and prison time if caught. It is better to ensure any cryptocurrency activity you run online is done legally.