Image by Pavel Danilyuk on Pexels (modified)
Dear reader,
I wish I had better news for you but the world is a pretty messed up place at the moment.
As long as food, housing and energy prices increase at a faster rate than salaries, the middle class looks destined for a brutal period of pain over the coming months and years. The rich will continue to do what the rich do best: stay rich. The poor will continue to scrape by on government support. Somewhere in between lies the hard-working middle class, a subset of society not typically privileged to government handouts or lucrative investment deals.
The larger the disproportion between salary increases and inflating prices, the quicker the band of middle class tightens and shrinks. The majority of people affected in this group will drop down a peg, but a minority of crafty individuals will successfully assume risk and level up a peg or two. Taking on risk is dangerous, but that’s usually the way out of the tightening squeeze.
Scammers, grifters, charlatans and swindlers are well aware of these dynamics and have been defining financial instruments to prey upon the naivety of uninformed investors for many years. You may have heard of pyramid and Ponzi schemes, the two terms are often used interchangeably to define organized financial scams but they are in fact entirely different specimens.
Building a Pyramid — The Illegal Way
Starting with a pyramid scheme, we can identify an individual or group of collaborators who are positioned at the top end of a triangle. These initial instigators onboard new participants below them, who then continue to invite new participants, and so on and so forth. As participants are usually incentivised to bring in new people, each new level of participants grows larger than its predecessor, constructing an expanding triangular hierarchy.
This form of scheme is destined to fail due to the simple mathematics of the project. If each new participant brings at least two more people in, the model grows at an exponential rate. At a certain point there is no room left to grow as there are no new people left to invite.
Image created by the author using Microsoft PowerPoint
Pyramid schemes can be extremely profitable for those based near the top as the commissions earned from new participants flow upwards through the architecture. This revenue is only as sustainable as the pyramid’s room for growth.
Now you may be asking yourself at this point what all these people are doing? Besides onboarding new people and funnelling commissions, pyramids cloak themselves in the guise of a company selling a service or product. If the organisation is not actually selling a product or service then this is considered highly illegal in most jurisdictions. This is a critical point to remember as it is very easy to draw comparisons to Multi-Level Marketing (MLM) services that resemble pyramid schemes but do technically sell a “legitimate” product or service.
A notable case of a pyramid scheme is Herbalife. The company was called out for its activities in 2016 and instructed to pay $200 million for conducting illegal operations.
Placing Trust in the Man — Ponzi Schemes
Ponzi schemes are named after a career scammer named Charles Ponzi, seen here below in all his glory.
Charles Ponzi mug shot circa 1910, public domain
Although the technique used by Ponzi was not necessarily a new innovation, the popularity of his operation was such that the technique became synonymous with the man himself. In 1920s Boston, policemen on horseback would guard over his office to keep the crowds of investors under control.
Charles was offering investors incredible investment returns such as 50% in 45 days for arbitraging postal reply coupons. In reality, he was paying previous investors with the proceeds of new investor contributions.
A more recent case involved the late Bernie Madoff, a Wall Street financier who chaired the Nasdaq in the early 1990s.
Bernie Madoff mug shot 2009, public domain
By leveraging his reputation in the financial markets, Madoff managed to con investors out of billions of dollars over several years until his scheme came crashing down in 2008. A recent calculation places the amount of lost investor funds at $64.8 billion, easily making it the largest Ponzi scheme of all time.
Unlike pyramid schemes that pretend to sell a product, Ponzi schemes operate under the guise of a legitimate investment portfolio manager, with no underlying financial product.
Only the Sceptical Survive
Crypto is a wonderful opportunity for both the middle class and the impoverished as it opens up financial markets to anyone with an internet connection. It also opens the doors to DeFi charlatans and NFT grifters who will take not think twice about feasting on your appetite for risk.
If you’ve been around crypto for a while then being sceptical of lucrative rewards should help sharpen your senses when evaluating projects (both new ones and the ones you’re already invested in). The recent crash in the market is a perfect opportunity to reflect and take stock of your portfolio.
If you’re new to crypto and virtual assets then it’s imperative to understand that the same rules apply here as they do outside on the street:
- If it’s too good to be true, it probably is
- Don’t take sweets from strangers
- If you’re not paying for it, you’re the product
Whatever you’re putting your money into these days, do yourself a favour and be overly suspicious and sceptical before betting the farm. Markets are down across all sectors, not only crypto, meaning there are also excellent returns on the horizon. However, the macro scene needs plenty of time to play out before we hit all-time highs again so take that into consideration before jumping on the next big thing that promises 50% returns in 45 days.
Stay safe out there folks!
JaseDMF
Image resources:
- Cover image
- Ponzi mug shot (public domain)
- Madoff mug shot (public domain)
Original content, copyright JaseDMF 2022. First published on Medium.
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