What are the differences and similarities between cryptocurrency and financial pyramids – top 5 myths and facts
There is an ancient wisdom that is known to many financial analysts: “Big profit – a big risk.” Indeed, risky investments can make good money. And many people are ready to take serious risks and even close their eyes to the global problems of the proposed earnings to get a big jackpot. This desire of people to make quick profits leads to the emergence of various fraudulent schemes such as the “Ponzi scheme” when the company does not generate the promised profit but makes payments by attracting new clients.
It is interesting that even knowing that such a scheme is not transparent, clients still invest in the company, forming a financial pyramid. And there are a lot of such people – the Bernard Madoff pyramid scam, which caused more than $65 billion in losses, is a great example.
Also, the emergence of new, highly profitable earning options (such as cryptocurrencies) is regarded as another illegal scheme and a financial pyramid. But cryptocurrencies must be radically different from pyramids and have a completely different nature.
Financial pyramids exist due to the influx of new clients
This is true because the payment of inflated dividends is impossible without attracting new investors. Previous clients of the pyramid receive the promised profit at the expense of new people who connect to the scheme. But this process cannot be endless, and bursts like a soap bubble at a certain moment.
But cryptocurrencies have a different approach. There is no such thing as contributors and dividends here. And some users make money transfers between their addresses/accounts, as well as miners who ensure the operability of the system and receive a reward for this from the same system (without the participation of third parties). The rise or fall in the value of coins depends solely on the market mechanism – supply and demand on cryptocurrency exchanges.
Allocation of the Funds
According to the principle of a financial pyramid, new investors make a contribution that helps it to develop, and these funds are concentrated in the hands of the organizers of this scheme (except for the money that goes for paying a profit to previous investors).
This is categorically incorrect for cryptocurrencies. Because they are mathematical code and a kind of key, placed on many computers around the world. Cryptocurrencies are widely dispersed across the planet, and the funds from their purchase or sale never end up with any particular person. The transaction takes place directly between the parties to the transaction. There is only a commission for payment for using the exchange’s platform, etc.
The “Endless” Scheme
In theory, the financial pyramid scheme can exist for a long time (if new clients invest in the project). No one can say when the moment of the “bubble burst” will come and many depositors will be left with losses.
Cryptocurrency is a mathematical algorithm, the number of units is limited and you can accurately calculate the time when all coins will be produced. Moreover, the demand for convenient, confidential, fast, and secure international transactions is growing, so the price can also increasing with time. This is similar to the rise in the value of the shares of successful companies, and Bitcoin (as a great example of cryptocurrencies) is a kind of digital asset that grows in value.
Transparency of the Organization
Most often, financial pyramids hide their activities and do not advertise this aspect to investors. Employees of the companies say that big profits become possible due to the promotion of some super popular product, insider information (in the case of trading on the stock exchange), the development of a new algorithm, etc.
The cryptocurrency is transparent and convenient. Yes, all transactions between owners are confidential, but all completed transactions are saved thanks to blockchain technology. And the information about the cryptocurrency cannot be distorted or deleted. Blockchain is called a glass safe, where all transactions are locked, but at the same time are greatly visible.
Blockchain – is a special distributed ledger, because the entire chain of transactions and the current list of owners are stored on the computers by many independent users. Even if one or more computers fail, the information will not be lost.
A financial pyramid is initially created to make a profit through fraudulent schemes and, often, outright deception of potential investors. But such a scheme is promising great dividends (and this works for early investors), so users accept the risk and opacity.
The purpose of creating cryptocurrencies is completely different. Its task is fundamentally different from the financial pyramids. The task is not to generate income on the growth of the value of the cryptocurrency, but to create a fundamentally new, decentralized, and state-independent monetary system based on a peer-to-peer distributed computer network.
As you can see, financial pyramids and cryptocurrencies have fundamental differences. The only major similarity is the ability to generate a high percentage of profits. But if we are talking about cryptocurrencies, then this is not done through the creation of any scam scheme, but competent financial management and carefully weighed investments. Therefore, if you want to get profit from cryptocurrencies, you must entrust this process to professionals.