A pyramid scheme (or Ponzi scheme) is a fraudulent system of making money which requires an endless stream of recruits for success. It is a scam because it promises people outrageous returns or payments, and pays them with money from new investors or members instead of money generated from the business. Since all pyramid schemes are not sustainable, they always collapse and people who join later always lose money.
A pyramid scheme is like a game of musical chairs. The last one to sit loses, although on a grander scale. Generally the people who lose are unsophisticated and the least able to afford the luxury of giving away their hard earned money.
The result of all these schemes is inevitable: at best, a few people walk away with a lot of money, while most recruits lose whatever money they put into the scheme. In fact, the only way anybody can make money through a pyramid scheme or chain letter is if other people are defrauded into giving money upon a promise of getting something in return when it will be impossible for them to get anything at all in return. That is to say, in plain English, these schemes always constitute fraud. They use deception to get money. That is why they are illegal. They are not illegal because they involve recruiting people to recruit other people to recruit other people. That is perfectly legal and is done to some degree in many legitimate businesses. They are not illegal because they involve giving money to people. It is perfectly legal to give money to people. They are illegal because they involve deceiving people in order to get money from them: that is the legal meaning of fraud.
Ponzi Scheme
The scheme is named after Charles Ponzi, who became notorious for using such fraudulent investment operation. Ponzi did not invent the scheme, but his operation took in so much money that it was the first to become known throughout the United States. In 1920's, Charles promised clients a 50% profit within 45 days, or 100% profit within 90 days. People were mortgaging their homes and investing their life savings. In less than 200 days, the scheme collapsed under its own weight, leaving nearly 40,000 "investors" with heavy losses.
Ponzi programs always pretend that they use the investors money to invest in money exchange (FOREX) and stock market and then will pay the investors through the profit they make but this is false because there is no investment that can make such a huge profit that enables the Ponzi programs to pay the investors. There are a lot of programs with different names that are Ponzi scheme. HYIP and Surfing programs are the most famous ones.
Matrix Scheme
A matrix scheme is another variant of a pyramid scheme. People give money to be added to a waiting list, waiting for a larger prize to be received at the end. Once a person has signed on for a matrix scheme, his or her name is added to the bottom of a waiting list. To move up by one level, the person must recruit enough members to fill all the positions in the matrix. Matrix Plans limit the width of each level in a distributor's group, forcing strong distributors to pile ("spillover") their recruits over people who did not sponsor them.
To camouflage the pyramid scheme, people may get a small token for their money, such as chocolate bar for $30 Dollars. Besides the fact that the item being sold is overpriced, the other problem is that 99% of the people entering a matrix scheme will never get anything except that original item. Since matrix schemes follow the same laws of geometric progression as pyramids, they are subsequently as doomed to collapse.
Binary Compensation Plan
Binary compensation plans have become the darling of startup multi-level marketing (MLM) companies. There is a an appeal to the binary compensation plans for newcomers to the field of network marketing. Newbies are sold on the idea that their upline can only place people in one of two places and thus a new person's business will be "fed" from above.
Binary means 2. Thus, each sponsor can have only 2 distributors in their immediate downline. The Binary Compensation is a specific case of a Matrix Scheme having a width of two. The downline is the term used for those recruited distributors who are placed beneath you. The Sponsor is the distributor who is immediately above you. However, the number of levels in the downline is infinite in binary compensation plans. Binary MLM compensation plans pay out a percentage based on the total volume on the lesser (least profitable) leg. You do not get paid on your greater leg.
In a binary compensation plan, the distributor must “balance” their downline. Say your downline is balanced and you enroll Bob on your left leg. Bob's recruiting takes off and he is generating a volume worth six figures per month. Well, you receive nothing from Bob's sales until you recruit the equivalent sales volume to your right leg. It is already difficult to recruit a new distributor, never mind recruiting an outstanding one. Worse, your compensation may diminish because of attrition. If you are not constantly recruiting on your right leg, then you may end up with a zero commission, despite Bob's sales breaking new records.
The recruiting pyramid scheme is quite clear. After working for several months, most distributors are still unable to recoup their initial cost (never mind making any money), and because of this, they drop out. In order for the top distributors to keep making their millions, they must continually recruit new distributors to replace those who drop out. Any failure in recruiting results in a collapse of the downline. The truth is the majority (at least 99%) of distributors are left holding the bag, while the top distributors make all the money (by defrauding their recruits).
Why Pyramid Schemes are Popular?
Pyramid schemes are popular because they appeal to greedy people... and greed can do wonders to a person's thinking. For a person desiring to make a lot of money from a small investment in a short amount of time, wishful thinking often takes over where critical thinking should step in. Wishes become facts. Skeptics become idiots for not getting on board. Desires become reality. Asking questions seems rude and unfriendly. Scam artists know how greed works and all it takes is one con man to get the thing started.
With the odds so stacked against a person, why would one gamble on a pyramid scheme? Greed is only part of the answer. Most pyramid people don't envision themselves anywhere near the bottom layer of the pyramid. Even the most greedy person on the planet would probably see that if one is near the bottom layer of recruits it will be very hard to get new recruits. They have to see themselves near the top in order to envision the immense wealth from minimal effort that is going to come their way.
Source:
https://www.igolder.com/glossary/pyramid-scheme/
Pyramid Schemes "Be Aware"
Originally Posted by ad_dur
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