Pyramid schemes today can be hard to recognize since they come in various forms and sizes. But all of them share one thing in common: they deceive people.
A pyramid scheme: what is it?
A pyramid scheme is a risky business model in which the first investors make money by bringing in new investors rather than selling products or services. The strategy works by asking prospective investors to pay a one-time fee before being permitted to take part in the plan. After that, the money earned from new employees is used to pay back the initial investment. Then, new members will be paid if they successfully bring in more users to the system.
How does the pyramid scheme operate?
The design is constructed in the form of a pyramid, as suggested by the title. The top-ranking recruiter is where it all begins; they are the first in the line of command. The next step is for the person to engage someone else, who also needs to invest a certain sum of money. The initial recruiter is then given the advance funds. The recruit must then enlist more people under him, each of whom will make an initial investment, to return his investment.
The recruit will have made a sizable profit on a small investment if they can persuade ten or more people to join. Each of the newly acquired members is in charge of finding new members. A person receives a sizeable profit for every ten people they bring on board, less the initial compensation given to the person who brought them on board.
The scheme recruiting goes on until it can no longer support itself. As a result, the top of the pyramid has seen tremendous benefits, while the bottom has seen financial losses.
Types of Pyramid Schemes:
The following categories essentially describe the types of pyramid schemes:
Multi-Level Marketing (MLM):
In contrast to traditional pyramid schemes, multi-level marketing is a legitimate business practice involving the sale of genuine goods or services. Members are not obligated to close any deals, on the other hand. To make money, they should hire people beneath them instead.
Some MLMs are identical to pyramid scams since they market printed goods with no real value, including educational courses. These MLM businesses operate by pushing new members to pay high costs for inferior goods, which they then have to pass to the subsequent members.
Chain emails:
Unsuspecting readers of chain emails are urged to send tiny payments to everyone on the list. The donor must replace his name at the top of the list after making the gifts in the hopes that some or all of his network of connections will send him money. Theoretically, beneficiaries keep collecting donations until their names are crossed off the list.
Ponzi scheme:
Ponzi schemes are financial frauds that trick one person into paying another. Although they lack the hierarchical structure of a pyramid scheme, they still give enormous profits to current owners in exchange for funds from new investors. Sadly, most people who invest in Ponzi schemes lose everything after being seduced by the promise of incredible returns.
Does the pyramid tumble?
It will function as long as the bottom layers of a pyramid are more comprehensive than the top levels. However, the system as a whole disintegrates when the structure's lowest levels deteriorate. Given the nature of hyperbolic math, pyramids are hard to sustain indefinitely, and someone will eventually lose their money. Surprisingly, even high-level early investors may experience financial losses after the process due to variables that delay their payments from subordinates and frequently require waiting periods.
Summary:
Pyramid schemes are outlawed in several countries. As a result of the network effect business strategy, people are regularly persuaded to refer their friends, which can be awkward for all parties involved and eventually wreak havoc on relationships. Investors should stay away from these scams.
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This table lays out the chronology of the building of the majority of the serious pyramids mentioned here.
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