Ponzi Schemes, Pyramids, and MLMs:  Understanding Differences and Similarities

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Ponzi Schemes, Pyramids, and MLMs:  Understanding Differences and Similarities

by

W. Paul Alexander

for

The Better Call Paul Blog

Hello Everyone! 

To those who do not yet follow this blog, a couple of weeks ago, I decided to write a series of articles involving Cryptocurrency/Blockchain scams that have, at times, rocked the crypto world quite a bit.  It is important to note that when I mentioned "scams," I am being all-inclusive of projects that ended up taking investor money and keeping it for themselves without doing what was promised to the investors.  By this definition, business failures like Mt Gox meet the criteria for inclusion, and very well may be included as a way to study the past to fix the future.  

This post, however, is a supplement to my normal postings in which I expose the scams for what they are.  Last week, I exposed the HUGE scam known as the Empowr Community.  It has become a very popular posting, and as a result, I would like to share it with any new readers to my blog.  You can access the Empowr expose by clicking here.

So, without further ado, allow us to jump right in to the topic at hand -- the Ponzi Scheme.... 

 

|.  What is a Ponzi Scheme? 

Many people mistakenly classify any "multi-level marketing" structured company/program as a "Ponzi Scheme."  The term has become basically a catch-all for fraudulent scams, but the truth of the matter is that Ponzi schemes have specific criteria that differentiates them from other schemes.  It is important to understand a Ponzi scheme and how to identify one, thus the motivation behind this posting. 

This gleaming difference that gives Ponzi schemes their own category is that, in order to be a Ponzi scheme, the structure of the company must be such that it makes it's profit from newcomers paying their initial dues.  In fact, in order to be a Ponzi scheme, the amount of revenue coming from new sign-ups will always exceed the revenue coming from the company's supposed flagship service or product.  

Ponzi schemes can be very simple or they can be massively complex and complicated.  They can be designed to scheme a few thousand dollars or over a billion, in cases like Bernie Madoff's.  

To understand it better, let's take a look at this simple, simple example below of a common single-party E-Bay Ponzi Scheme: 

1.  The scammer (we'll call him "Seller") makes an eBay account and buys 10-20 small items in order to establish a bit of positive feedback. 

2.  Seller opens an Ebay seller account. 

3.  Seller places high-dollar items on sale, staggering the start date of the listing to where there is a 2-day gap between them.  

4.  Seller repeats this process about 4-5 days later. 

5.  As the first customers start to inquire about where their items are, Seller apologizes and blames "the mail," and then uses the latest payment to refund the earliest customer.  

6.  These people all leave positive feedback (or no feedback at all). 

7.  Rinse and repeat.  

Finally, this will keep occurring until system of refunds and new listings can no longer sustain itself.  Once it looks like things are about to go bad or an account is about to be limited, Seller will make one last push selling high-dollar, non-existent items and will then disappear.  

The saddest thing about Ponzi schemes is that, more often than not, unless the value lost is in excess of $100,000, the federal government may not pursue charges -- even if they know who did it and can prove their case beyond a reasonable doubt!  

Of course, as law enforcement agencies see budget increases during good economic times, this threshold will lower. 

 

|.  What is a pyramid scheme/multi-level marketing scheme and are they always scams? 

Many people confuse Ponzi schemes and multi-level marketing schemes as though they are one-in-the-same.  They are not, but there is one rule of thumb to remember: 

1.  All Ponzi schemes are MLMs but not all MLMs are Ponzi schemes.  

The MLM structure resembles a pyramid -- with the newest and lowest-ranking members as the bottom and the most senior or most valuable person is at the top.  Because each level you rise in the organization is prohibitive by nature, there are less people on each new level -- making the structure of the business take on the aforementioned pyramidal shape.  

All Ponzi schemes that involve more than one person will have an MLM/pyramid structure, where the money from the newest go to finance the income of those on top.  

However, this is not mutually exclusive.  An MLM structure does not always mean that a company is a Ponzi Scheme, and there is nothing inherent to the MLM structure that even makes it wrong, immoral, or illegal.  In fact, some very good projects and products come from MLM-structured businesses.  

For example:  

1.  AVON - This mainstay of the health and beauty field has independent distributors and is structured like an MLM.  

2.  CryptoTab browser -- this new and innovative browser pays its affiliates via an MLM structure with 10 levels of income out.  It is not at all a Ponzi scheme -- it is completely legitimate and has faithfully paid out every request I have made.  In fact, even though I try to shy away from MLMs for the most part, I have been pleasantly surprised by #CryptoTab, to the point that I advocate everyone getting in while they still can -- why not get a free $40-50 per month in BTC for doing absolutely nothing?  

Get your piece of the CryptoTab pie today:  https://inorangepie.biz/10093214?l=55.  If you use this link to download it, I will make about $2.00 -- Full disclosure. 

Read my prior article giving users an update on my CryptoTab earnings to demonstrate that it really pays:  Better Call Paul Blog - CryptoTab Update.

3.  Other companies include Mary Kay Cosmetics and Kirby Vacuum Systems -- they all pay their "distributors" or "contractors" according to a multi-level approach where each level higher gets a higher commission level then the one previous. 

The thing about MLMs that most people fail to understand because of the incorrect belief that all MLMs are Ponzi schemes is that MLMs are not always fraudulent -- no more so than any other style of business.  Of course, there are ways to exploit the MLM/Pyramid structure to take advantage of those below you to enrich yourself unjustly, but if the company allows such exploitation, they are no longer a "reputable" organization. 

|.  Conclusion

As we move through and dive deep into my upcoming CryptoScams expose projects, it is going to become very important that my readers fully understand the difference between the many different types of scams that exist out there.  These supplemental articles will cover everything from the topic included herein to other common scams, such as money transfer/employment scams, Nigerian Prince scams, and many others.  

Today, you should have learned the definitions of both a Ponzi Scheme and and MLM-structures business, as well as the differences between both of these.  You should understand now that every Ponzi scheme is a scam but not every MLM business is.  Furthermore, even though every Ponzi scheme has the pyramidal structure of an MLM; not all MLMs are Ponzi schemes.  

That just about wraps it up for now, guys!  

Until next time... 

for

The Better Call Paul Blog Series on CryptoScams

Published February 10, 2020

Revised February 13, 2020

Copyright: Alexander Partners and Associates/The BetterCallPaul Blog. 

All Rights Reserved 

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