Cryptocurrency Pyramids: How not to Become a Victim of Scammers

• What is a cryptocurrency pyramid?
• The most famous cryptocurrency pyramids
  • OneCoin
  • BitConnect
  • PlusToken
• Signs of a cryptocurrency pyramid
• Why financial pyramids are developing so quickly, and people are investing huge money in them
• How do fraudulent schemes disguise themselves as honest cryptocurrency projects?
• How to distinguish a reliable cryptocurrency project from a fraudulent scheme?

Financial pyramids appeared a century and a half ago. During all this time, millions of people have taken the bait of scammers. The world is changing, but the cheat schemes remain the same. With the growing popularity of digital assets, along with the classic financial pyramids, cryptocurrency ones have also appeared. Fraudsters immediately realized that a lot of money was circulating in this area, which was an excellent field for their activities.

What is a cryptocurrency pyramid?

A Ponzi scheme (“pyramid”) is a fraudulent financial scheme in which payments to organizers and early investors are made from money received from new members. When the interest expense rises above the incoming funds, the pyramid stops paying and closes. As a rule, the organizers of the pyramid appropriate all the remaining money.

In the cryptocurrency world, pyramid schemes are quite common. They mainly work in countries where most of the population is financially illiterate. For the creators of the pyramids, cryptocurrencies are convenient because of the anonymity and irrevocableness of transactions, as well as the possibility of attracting victims in any country in the world.

The swindler from Russia Sergey Mavrodi was notorious not only in the 1990s. After the structure of the classic financial pyramids of MMM Global, he turned his attention to digital assets. In 2015–2017, Sergey Mavrodi was active in Asia and Africa. Taking advantage of the illiteracy of the population in cryptocurrencies, he created several pyramids there. Moreover, projects often operated for only a month. There are also ‘long-playing’ cryptocurrency fraudulent schemes. In this case, a token is launched, which can only be withdrawn through the exchange or the wallet of the pyramid itself. No blockchain technologies are used in transactions. The numbers are simply shown on the accounts and wallets of users. Such pyramids can exist for years and imitate a successful development of the project for a very long time, as long as the founders receive huge income.

Aleksey Shepelev, a teacher, mentor, professional web developer with over 12 years of experience, dealt with the classification of cryptocurrency pyramids. Sharing his research in this area, he says,

“Once I was very interested in ‌cryptocurrency pyramids as a way of investing. There was a lot of information on the web on classifications of pyramids, signs of fraud detection and methods for predicting closure. Inspired by this knowledge, I started investing—and lost 95% of my deposit. I wondered if it was possible to make money on the pyramids at all. To do this, I made a program that ‘pulled’ and analyzed information about over 5000 online pyramids. The period of existence of the pyramid, the payout percentage and its type were taken into account.

“In total, I identified 3 types of pyramids:

1. The high-interest ones in which the profit is over 61% per month;

2. The medium-interest ones in which the profit is 17–60% per month;

3. The low-interest ones in which the profit is 6–16% per month.

“The results surprised me a lot. 98% of highly profitable pyramids were closed without paying a single ruble. The middle-interest ones did not go very far, with 92%. The low-interest in 64% of cases also paid nothing to anyone. As cold calculation showed, even if you diversify your investments, it is almost impossible to stay in the black. But people still send their cryptocurrency savings to online pyramids, with the expectation of a freebie. And scammers, taking advantage of the anonymity of crypto payments, are happy to deceive them.”

The most famous cryptocurrency pyramids

Although pieces of news about the emergence of various fraudulent projects are constantly flashing in the media and social networks, people still become victims of cryptocurrency pyramids. As an example, let's cite several projects whose founders deceived people for tens of millions and even billions of dollars.

OneCoin

OneCoin is considered one of the largest cryptocurrency pyramids. It functioned from 2014 to 2017, stripping of money about three million people and defrauding investors for a total of about $5 billion. The founder was the Bulgarian fraudster Ruzha Ignatova. The pyramid worked according to the classic scheme, in which participants received a reward for each invited new investor. The scammer convinced investors that OneCoin would soon become the most influential cryptocurrency in the world. They even claimed that OneCoin would destroy Bitcoin. The most surprising thing was that the cryptocurrency did not even have its own blockchain and was only accepted on websites associated with the pyramid.

BitConnect

BitConnect was another major cryptocurrency pyramid that operated from 2016 to 2018. It was created by unknown developers, and at the head was a man named Satao Nakamoto. Participants bought BCC tokens and blocked them on a special platform, and the trading bot automatically accrued profits. Members of the pyramid were promised an income of 40% per month. According to the organizers of BitConnect, with an initial investment of $1,000, investors could expect a profit of about $50 million over three years.

The first critic of the pyramid scheme was Ethereum Co-Founder Vitalik Buterin, who drew attention to the fact that the promise of 1% profit per day is a classic sign of a pyramid scheme. After a while, Michael Novogratz of Galaxy Investment Partners and Litecoin creator Charlie Lee agreed with Buterin's opinion. The organizers of BitConnect had questions from the UK government, which demanded that the company disclose its business model. However, this did not stop the scammers from participating in cryptocurrency events and successfully attracting new investors.

PlusToken

This was the youngest and largest financial pyramid in recent years. Founded in 2018, the pyramid posted information about itself in the popular Chinese messenger WeChat, promising 10–30% profit per month. About four million people became members of this powerful pyramid. The scammers allegedly promoted financial literacy and taught people how to use cryptocurrencies, but ultimately sought to convert them into Plus tokens. Justice nevertheless caught up with the organizers of the scheme, and a year ago, six of them were arrested at the request of the Chinese authorities. However, the $3 billion of the investors ended up in the wallets of the PlusToken team, and it is not possible to return them.

Signs of a cryptocurrency pyramid

Cryptocurrency pyramids, like classic fraudulent schemes, have obvious signs. Similar methods of deception have existed for far more than just a dozen years, but the scenario has always remained the classic one, with different “trimmings”. We asked experts how to recognize a cryptocurrency pyramid and what characteristic features it had.

Danatar Atajanov, Brand Manager of OXLY.IO, says,

“The main signs by which a scam can be recognized are promises of exorbitant profits and aggressive advertising that uses psychological triggers such as images of a large amount of currency, attributes of a beautiful life like expensive cars, jewelry and accessories. Luxury items are located in luxury locations: expensive hotels, swimming pools. There are recognizable places where millionaires live: the Emirates, Monaco, etc. As a rule, images are accompanied by calls to invest money or seek advice from a “superguru” who knows how to earn great amounts of money quickly. The words will be accompanied and confirmed by calculation figures with penny investments and fabulous dividends, and photographs of happy owners of money fans will serve as proof. Another sign of the pyramid can be considered referral programs with the promise of ‘goodies’ for invited friends and comrades. After all, pyramids rely on new members. These projects are often not even related to cryptocurrency in any way. Cryptocurrency symbols are simply used as bait.”

Mikhail Bogdanov, Founder of the cryptocurrency platform koshelek.ru, advises not to believe in the promises of quick and easy money, saying,

“The more promising the industry, the more scammers appear in it. Of course, this is bad, since real projects do not receive funds for development, and people lose their savings. If you are told about sky-high profits in a short time, then this is definitely a pyramid scheme. But there is also a more complex disguise. If you like some project that seems adequate to you, then still check what is written about it in the media, whether there are negative reviews, whether the legal entity is real, where it is registered, etc. This will help to protect yourself from scammers as much as possible.”

Roman Nekrasov, Co-Founder of LAZM, serial entrepreneur, IT engineer and expert in information and decentralized technologies, also believes that the key sign of a cryptocurrency pyramid is the promise of big returns. He says,

“The major feature of a crypto pyramid is the same as that of any other financial pyramid: the investor is promised a certain, most often fabulous level of profitability. If you are promised that your investment will double in a month, think 100 times before investing there. And if, nevertheless, the desire to take risks and earn money gets better of you, then risk the amount of money that you can lose without going bankrupt.”

Dmitry Golubovsky, an analyst at FG Kalita-Finance, identifies several main features of cryptocurrency pyramids, saying,

“It is not necessary to single out cryptocurrency pyramids as some separate class of fraudulent schemes. It’s just that now, when there is a strong revival in the cryptocurrency market and cryptocurrencies are on everyone’s lips, it has become a fashionable topic, including for scammers. If gold grew at 3–5% per month continuously for six months, there would certainly be enough scammers who would attract money to some projects related to it, from buying bullion somewhere offshore to investing in shares of some cooperatives washing gold in Chukotka in Russia. This was observed during the 2011 rally.

“Any such fraudulent scheme is quite easy to identify by the following features:

• They promise a stable high yield of 3% per month. If they guarantee a fixed high percentage, then this is a pyramid in its purest form. If they confidently promise something ‘on average’ and give a ‘history’, then this is most likely a pyramid disguised as an investment scheme. Even the best hedge funds in the world have never returned more than 60% in the best of times for two years in a row, never in the history of this industry.
• If there is no real legal entity behind the investment scheme and money is attracted to the scheme to anonymous electronic wallets or wallets of individuals, this is a clear sign of fraud. If there is still a legal entity, but for investments there is no option to transfer to the bank account of the legal entity, then this is probably a cover for a fraudulent scheme. If there is a legal entity and even a bank account, but it is opened in some bank of dubious jurisdiction, such as Belize and the like, then this is also very suspicious. Such organizations should be avoided.
• The investment scheme is equipped with a bonus program, like in multi-level marketing ‘Bring a friend, get a percentage of his investment.’ This is a network pyramid.”

Alexander Valtsev, SEO specialist of the online university SF Education, has a similar opinion. He says,

“Cryptocurrency pyramids, and indeed any financial pyramids, can be called the top fraud. They appeared a very long time ago and have always attracted a lot of people. It is quite easy to distinguish them, and there are several specific criteria to understand if you are dealing with a pyramid:

• The promise of stable high incomes. This is the most important criterion by which you can determine a pyramid. No normal investment project will ever be able to offer guaranteed high returns.
• Lack of information about the owners, or it is unreliable.
• Closed code, closed blockchain. In most cryptocurrency pyramids that have their own tokens, there is no open source code, which is a sign of decency in most cases.
• The need to attract new investors. This is not always the case, but if you need to attract new customers to make a profit, this is a 100% pyramid scheme.”

Why financial pyramids are developing so quickly, and people are investing huge money in them

In order not to become a victim of scammers, you need to expand your knowledge in cryptocurrencies and blockchain technologies. The illiteracy of people is the main reason cryptocurrency pyramids are so popular and function successfully. If a person does not understand what exactly the project is based on and what determines its profitability, they cannot judge how honest the developers are with them. Aggressive marketing and playing on emotions—all this contributes to the fact that more and more people are investing in cryptocurrency pyramids.

The experts also shared their opinion on why cryptocurrency pyramid schemes were so popular among people, although many had already had an awful experience with classic financial scams in the past.

Danatar Atajanov says,

“Several main factors contribute to the rapid development of pyramids: the revival of interest in cryptocurrencies, the population's fatigue from traditional investment tools and their inefficiency. Deposits and real estate have run out of steam, and exchange trading is too complicated and risky a tool. Well, I must say that the costs of launching such a pyramid are small, relative to launching a real business. Modern information and marketing technologies help scammers find a way to the right target audience, while not embarrassed by the cost of promotion”.

Mikhail Bogdanov believes that the main reason is well-thought-out marketing. He says,

“Financial pyramids need customers, and as a result a huge part of their funds goes to advertising, and therefore their audience reach is fast.”

Alexander Voronkov, a qualified investor and head of an investment club, believes that the reason for the above is the illiteracy of people. He says,

“If classic fraudulent schemes can cause logical questions from at least some part of people (but where does the money come from many times more than invested?), behind the veil of cryptocurrencies, you can create many variations of legends to the effect that money is flowing like water. From this follows the answer to the question of why many people carry money there:

• Misunderstanding of the process (and as a result, the lack of psychological resistance);
• Greed (the desire to get quickly and much);
• Involvement in something ‘great’ (well, it's almost like investing in Apple or Facebook at the stage of garage investments).”

Dmitry Golubovsky says,

“Cryptocurrency pyramids thrive because of the stupidity and greed of people, multiplied by the hype. There is now an investment boom all over the world that hasn't been seen since the Dot-com bubble in the early 2000s. It was provoked by the fact that people had a large amount of easy money in their hands which the governments of developed countries distributed as part of post-crisis demand recovery programs. This provoked an investment boom in the United States, which quickly swept the whole world. This is a phenomenon of the same order as the ‘gold rush’’ of the 19th century described in the writings by Jack London. However, investment fevers are more short-term, and end in a couple of years.”

Alexander Valtsev supposes that the reason lies in the gullibility and greed of the people themselves. He says,

“Both financial and cryptocurrency pyramids parasitize on the main human vices—greed and laziness. Since the time of Charles Ponzi, all such organizations have actively exploited the reluctance of people to work and get big money. To this we add the ignorance of many people about cryptocurrencies and get a wide distribution of cryptocurrency pyramids. There are many people who want to make money on cryptocurrencies, which they heard about somewhere that you could earn big money on it.”

Roman Nekrasov says,

“People want to make quick money. In my opinion, if pyramids are popular in a society, this signifies a decline in the country's economy. This means that people do not see other ways to earn a decent living. This means that social elevators do not work. This is similar to how people with stage 4 cancer are ready to believe that they can be cured with soda. It's out of desperation.”

How do fraudulent schemes disguise themselves as honest cryptocurrency projects?

The main problem associated with cryptocurrency pyramids is that now few people can immediately distinguish an honest project from a classic fraudulent scheme. There are many startups raising funds to develop their business ideas. Users do not know whom they can trust, because both of them talk about unprecedented prospects, high incomes and assure that a team of experienced developers is behind the project. In fact, everything turns out to be completely different. Fraudsters deliberately pass off their projects as honest business, infiltrating currently popular areas in cryptocurrencies and blockchain.

We asked experts how cryptocurrency pyramids masqueraded as honest projects and what they thought about it.

Roman Nekrasov believes that scammers play on people's ignorance. He says,

“Crypto pyramids have features that distinguish them from traditional financial pyramids. In the description of crypto pyramids, all sorts of technical terms often appear that help scammers confuse the investors. Fraudsters play on feelings such as fear of missing out on profits. They come up with explanations of high profitability with some unique investment schemes and new approaches to investing in the crypto world.”

Danatar Atajanov gives specific examples,

“The most common and, perhaps, the most affected type of real business that the pyramids mimic is cloud mining. There are special portals on the Internet with lists of pseudo mining projects that are updated in real time. Another way to disguise oneself is to pretend to be a crypto investment project with experienced traders, magical algorithms and trading bots that will provide investors with big profits, often hundreds of percent per month. The duration of the products of such companies is usually about a month, and often this period is the duration of the pyramid. Unfortunately, as long as people send money for empty promises, without looking at the real state of affairs of the service provider, such as the availability of their own data centers, equipment and conditions, the reputation of real crypto projects will still remain endangered. And honest companies will also suffer from distrust.”

Mikhail Bogdanov advises to beware of any investment proposals. He says,

“Often they are disguised as cryptocurrency funds or projects that propose you to invest in them. You will need to replenish the balance and choose an investment plan or buy their token, but these funds will be temporarily frozen and you will receive profit only after the funds are unlocked. And most importantly, the interest will be simply huge.”

Dmitry Golubovsky tells how cryptocurrency pyramids are disguised as honest projects. He says,

“Either they disguise themselves as ‘trust management’, when supposedly a team of professionals who have mastered some special methods of trading cryptocurrencies promises to increase your investments with their art of speculation, or they disguise themselves as investments in some particularly perceptive token, which is associated with some next project to conquer the entire global market of digital goods and services and another 5% on top. There are also combinations of these two ideas.”

Alexander Valtsev says,

“In fact, cryptocurrency pyramids are practically no different from ordinary financial pyramids. They also lure people in with huge profits, passive business dealings, and displays of luxurious living. The only difference between cryptocurrency pyramids is that few people understand anything about the mechanism of cryptocurrencies. People go to such pyramids much more willingly than to ordinary ones, because it is fashionable and incomprehensible. And then they are also proposed to earn big money—well, how can they not agree to invest in Johndoecoin or John D Incorporated?”

Alexander Voronkov expresses the same point of view, saying,

“In fact, the cryptocurrency pyramid is no different from the most ordinary financial pyramid, except that all financial manipulations in cryptocurrency give a higher level of privacy to the organizers, thereby letting them do anything in terms of movement and cashing out. If we are talking about the classic ‘MMM’, then the organizers have a rather big problem with the movement of funds, since the higher the amount, the closer the attention of supervisory authorities and the more difficult it is to cash out. However, if we are talking about cryptocurrency investments, this problem is almost completely absent.”

How to distinguish a reliable cryptocurrency project from a fraudulent scheme?

In order not to invest in a fraudulent scheme, you need to carefully study the project. Experts give some valuable advice that will help investors and ordinary users save their money.

Marat Mynbaev, an expert in the crypto market fundamental and technical analysis, Founder and the first head of the Amir Capital online fund, tells how to distinguish a fraudulent scheme from an honest project. He says,

“Any company, regardless of what market it operates in, must have licenses to operate. Ask if the company has an Insurance Fund, how funds are distributed in the company, what will happen in case of force majeure, etc. This information is also should be in the public domain.

“Take an interest in who the founder of the company is and study his autobiography: how long has he been in this business, what else did he do, his experience, participation in specialized events, expertise, etc. This is also a very important point.

“Try to find answers to the following questions:

• Who works in the company?
• Are there any staff at all?
• Are they listed on their website?
• Is it possible to communicate with these people?
• How open is the company to communication with its customers?
• Is the body of the deposit frozen? What are the deposit conditions, and when can you withdraw your money, etc.

“The perennial question is: where does the money come from? Don't listen to or read any marketing plan until you get the answer to this simple question. Any activity must be transparent to the investor. The main income of the investor, i.e. income as a percentage of their investment, must be greater than just from an affiliate program.

“Also find out if the new investor receives income from a partner's deposit. This is also a very important question. If so, then that's something to think about. This information should be open to everyone.

“The company's development strategy for at least 5 years is also important. This information should be open to everyone. What will happen next to the company, what plans does the management have, and do they have any at all? Any honest businessman who has come to the market for a long time has his own roadmap and is happy to share it. Moreover, the yield should be market-based, not overpriced, like 1% per day, 13% per month or the like.”

Mikhail Bogdanov, Founder of koshelek.ru cryptocurrency platform, advises to learn more about the founders of the project. He says,

“A reliable project has a registered legal entity, there is most likely something about them in the media, and the director or project holder is a public person, you are not promised fast and big money. And look for reviews about the project.”

Dmitry Golubovsky, an analyst at FG Kalita-Finance, advises to be more careful with startups, saying,

“Behind a reliable project, there must be a reliable, already functioning business that has decided to expand into the cryptocurrency ecosystem. If there is no such business, but there is some startup promising mountains of gold, then this is a lottery ticket with a very small chance of winning.”

Alexander Valtsev, SEO specialist of the online university SF Education, also gives some advice,

“The difference between a reliable cryptocurrency project and a pyramid is in the product. In normal cryptocurrency projects, there is always some kind of product. It can be a blockchain technology, a fintech model, or anything. The main thing is that there is a working product and people really need it. Well, the promised returns also distinguish a normal project from a pyramid scheme. In an ordinary cryptocurrency project, no one can promise investors a guaranteed, much less a high return. The truth is always limited, but lies are not.”

Roman Nekrasov, Co-Founder of LAZM, believes that it will not be easy to distinguish a fraudulent scheme from an honest project. He says,

“Alas, in order to distinguish a worthwhile crypto project from a fraudulent one, you will have to spend time and effort to study both the technical component and the business model on which the project operates. In addition, some projects that do not at all seek to deceive investors may also fail, not getting into the market or falling apart due to lack of demand or an ill-conceived business model. Not all failed projects are fraudulent. Some simply failed.”