Whenever it comes to Bitcoin or other cryptocurrencies, I often hear harsh opinions: “Bitcoin is a pyramid! Don't drag us into it!" Or “Let's not talk about this bubble!” Such statements are usually caused by negative information that circulates on the Internet.
Several years ago, having become interested in Bitcoin, I wanted to figure out: where are the reliable facts, and where are someone’s misconceptions?
Is it true that Bitcoin is a pyramid scheme?
The answer to this question is very important. You cannot invest money until you understand all the risks. I found the answer for myself. And in this article I share it with you.
I have identified 6 main negative opinions, key complaints about Bitcoin. Here they are:
Why are people afraid of cryptocurrencies?
Blockchain technology originated from the programming industry, and its first users were exclusively developers. At that time, the financial market for cryptocurrencies had not yet formed, so all the developers who started working on digital assets became millionaires.
Against the backdrop of news about programmers getting rich, the first investors became interested in digital coins. Among them were people who were far from financial literacy. Many people took out loans to make a purchase and spent all their savings without thinking about the risks. This is how the first wave of bankrupt investors was formed, who simply did not know what to do with coins and how to make money on them.
Following the rumor about an easy way to make money, there were rumors that Bitcoin is a financial pyramid. Without getting into the details, what else could the picture look like when some people become millionaires while others lose their money?
But financial pyramids have distinctive features, and once you understand them, it becomes clear why Bitcoin is not a pyramid.
History of BitConnect
Some incentive models in cryptocurrencies have been subject to analysis and criticism. Potential pyramids have been discovered.
One example is the now defunct Bitconnect.
Before it was shut down in early 2022, it was an anonymously run site where users could give their cryptocurrency to a company in exchange for profits based on the term of the loan. For example, a $10,000 loan for 180 days supposedly yielded ~40% return each month with a daily bonus of 0.25%.
Bitconnect allegedly used its own Boteting software to invest in Bitcoin. To participate, users had to purchase Bconnect's native currency, BCC (at one time trading at $400 per coin).
Bitconnect also had a tiered referral system that rewarded members for using social media and signing up friends. In November 2016, the UK registrar of companies threatened to shut down the company, and only the Texas Securities Board and the North Carolina Securities Division issued warrants.
Shortly thereafter, Bitconnect announced it would cease its lending and exchange programs with immediate effect. Some users, judging by the messages left, invested 500 thousand dollars (borrowed) or all their family savings into the project. These are amounts sufficient to invest in large sustainable companies!
They also launched XRPConnect and NEOConnect, which are now closed. But EthConnect, based on Etherium, continues to exist.
Here are their advertising promises:
We have developed a model in which investors can make profits in different ways. Investors can store their coins in wallets and earn large amounts of money over a period of months or more by holding and staking coins. Our coin will also allow miners to mine it. Investors will then be able to trade coins across multiple exchanges and see their investment grow as demand increases. Finally, our new volatility software will allow our current and future investors to buy directly from exchanges to be able to leverage their ECCs (EthConnect Coins) to earn rewards that will be paid out every 24 hours on a percentage basis. Investors will have the option to choose how long to grant their ECC, from 60-200 days, and will also have the option to reinvest their daily earnings to increase investment and growth.
As we see, in the financial pyramid of this cryptocurrency, income is promised simply from everything.
Another model used by some projects involves launching a cryptocurrency using funds raised by selling the currency at a significant discount (e.g. 75%).
The promoter makes more money by offering currency at lower discounts. As long as early buyers are free to dispose of their inventory and new buyers continue to arrive, early investors receive an almost automatic payout. The validity of these models has not been proven/proven but, in addition to the potential problems with unregistered securities, warrants careful investigation.
Financial pyramids or Ponzi scheme
In 1919, Italian “pyramid builder” Charles Ponzi created the first pyramid. He convinced people that he could make money on the postal bills that existed at that time and promised income of up to 100% per month to those who would buy them from him. He took money from the last investors and gave it to the first ones. This scam was called a Ponzi scheme, which is still in operation today.
Signs of a financial pyramid:
- The pyramid has centralized management, often in one person.
- The pyramid is aimed largely at attracting new investors, most often without retaining old ones. But the Ponzi scheme itself is characterized by an interest in retaining the first investors, giving them the opportunity to reinvest so that the scheme will work much longer.
- There is always a legend according to which the manager has developed a unique earning scheme.
- Pyramids conduct aggressive marketing and offer investors to receive a percentage of the deposit of those they bring to it. The principles of network marketing and MLM are used.
As you can see, Bitcoin and other decentralized cryptocurrencies do not have a single manager, this is contrary to the nature of the blockchain. No one promises any income at all, except for the “lucky ones” who are well versed in the tools of trading on the stock exchange. Marketing as such in the first cryptocurrencies, especially Bitcoin, is completely absent.
Thus, the claim that a blockchain project is a pyramid scheme is complete nonsense from people who hardly have any idea how blockchain works. Now let's figure out why Bitcoin is a bubble?
Intrinsic value
This term is often used as a reproach for cryptocurrencies, especially Bitcoin. It cannot be compared with gold because it has industrial value, used in medicine, in design, as jewelry to satisfy the aesthetic needs of society. This gives it some value.
But is gold's current value a reflection of its intrinsic value? As Warren Buffett said:
Gold is mined in Africa or somewhere else. Then they melt it down, dig another hole, bury it again and pay people to stand by and guard it. It does not make sense. If someone looks at us from Mars, he tears out his hair in confusion.
The billionaire is talking about bullions that are melted and put into storage. But comparing cryptocurrencies with gold is not entirely correct. This is not a means of payment in the modern world. Fiat currency, for example, also has no intrinsic value: it is not worth the paper it is printed on.
But the demand for currency is created:
- by law, people must accept payments in national currency,
- the government requires you to pay taxes in the currency produced by the central bank.
Of course, if someone could print or copy money themselves, the system would be useless, so the currency has artificial scarcity and is protected from counterfeiting.
When will the Bitcoin bubble burst?
A soap bubble is a situation in the asset market, including shares on the stock market, when the value of a project is significantly exaggerated. Hence the name.
For example, a certain messenger whose shares are traded on international exchanges claims to have unique security technologies. The company's shares are trading at a high level, but, let's say, information emerges and is confirmed that there is no encryption technology. It is about this situation that we can say that the bubble has burst.
There are also milder examples when the stock price corrects downward after a sharp increase. This situation can also be called a bubble. This process can happen with Google shares, oil, Bitcoin - with any type of asset. This is normal for a volatile commodity market. But there are also real pyramids and bubbles, which in the cryptocurrency community are called scams.
Excessive energy consumption
One of the most common complaints about the Bitcoin network is the high amount of electricity consumed to mine the cryptocurrency. To some extent, this is true, since a huge number of computers around the world are constantly in active mode to maintain the operation and security of the BTC network.
However, based on this fact alone, Bitcoin should not be ostracized, especially when we remember that other industries also consume huge amounts of energy.
Indeed, Bitcoin's carbon footprint is comparable in volume to the emissions of some countries. But he is not alone in this. For example, according to some estimates, the energy consumption of computer networks of the modern international banking system significantly exceeds that of Bitcoin. In addition, Bitcoin, known as “digital gold,” surpasses the traditional gold mining industry in terms of energy consumption.
Comparison of the amount of electricity consumed by Bitcoin with similar indicators of the banking and gold mining industries:
In any case, discussions about the transition of mining equipment to environmentally friendly energy sources have recently intensified. One of the catalysts for these processes was the recent high-profile decision by Tesla to suspend accepting payments for its cars in BTC. As Tesla CEO Elon Musk explained, the company is concerned about the negative impact of Bitcoin on the environment.
Types of cryptocurrency pyramids
A pyramid can be recognized by the above characteristics of financial pyramids. Very often, such projects are disguised under the guise of cloud mining, because no one knows 100% whether the platform owners have this equipment, and if it does exist, is there really so much of it? We wrote a review of old and reliable cloud mining services, but we still warn against concluding contracts with them. Nobody knows what will happen to these projects in a year.
The second type is highly profitable and investment platforms that have a “unique scheme” of earnings that guarantees 30 percent or more income per month. Such companies also have all the hallmarks of a Ponzi scheme - they fall into the category of pseudo-investments.
There are investors who know how to analyze such projects, compose an investment portfolio from such scams (for example, from 10 projects) and can earn quite good money. The profit from 2 projects can cover the loss from the remaining 8, plus they have their own channels for attracting referrals. Plus, the more they involve uncomprehending investors, the more they themselves will earn. This process in cryptocurrencies is called Shilling, and such touts are called “scammers”.
The third type is Scamcoins, or shitcoins. These are real cryptocurrencies, the website of which clearly states that buy a token now and it is guaranteed to bring you profit when its price increases 10 times. Very often such coins appear through ICO.
Cheap crypto money
The cost of the pyramid today is so low that it is possible to recoup the investment (for creating a website and organizing the distribution of messages in instant messengers) at the expense of several participants. Lawyers ironically say that engaging in financial pyramids is now more profitable and safer than doing traditional business.
“Networkers” who promote financial pyramids boast about their super-incomes on social networks, and investigations into cases of financial pyramids drag on for a long time. A striking example is the cases of AirBit Club and Finiko. This is seen by ordinary entrepreneurs whose businesses have suffered during difficult times. Even they are beginning to think that it is easier to invest money not in their own business, but in a pyramid and receive large profits in the first stages of its development,” explained Alexey Makarov.
Investments in cryptocurrency become most popular during periods of rising prices for Bitcoin or Ethereum, and scammers do not have to spend money on marketing, explains Finam Group analyst Leonid Delitsyn
. Now the period is just favorable - the price of Bitcoin has increased almost ninefold since March 2020.
“When something goes up in price sharply, it arouses general interest. The media, bloggers and simply opinion leaders are rushing to speak on this topic. In 2017, the statistical tool Google Trends showed the rise of the query “bitcoin”. During such a period, pyramid organizers can reduce costs. “Ethereum” is often searched for now.”
Leonid Delitsyn
Analyst at Finam Group
Advertising, as a rule, is ordered from bloggers on YouTube and Instagram, and information is disseminated in telegram chats with “investors” or deceived investors of other projects.
However, such advertising is carried out mainly by dubious Instagram bloggers with 200–250 thousand subscribers with a high proportion of fake audiences and bots, says the founder of the DoDook communication agency Konstantin Afanasyev
.
– These pseudo-influencers do not delve into the essence of the product and service they are promoting, are not responsible for the consequences of advertising fraudulent schemes, and are only trying to make money. However, there are those who deliberately do this, asking for a fee one and a half to two times higher than usual,” he says.
Kabardino-Balkarian bloggers promoted a pyramid
Several hundred residents of Kabardino-Balkaria wrote statements to the police after becoming victims of a financial pyramid.
The scammers quickly promoted their Instagram page with the support of local bloggers. “Octagon” understood the 300 million ruble case and why reputation is far from the first place for Russian bloggers. Go to material
Afanasyev estimated the cost of advertising such a project for a blogger at 150–250 thousand rubles per post - a relatively low price, since they are usually not in demand among large advertisers due to their dubious reputation.
How to recognize a cryptocurrency financial pyramid?
In the case of the first two types of cryptocurrency pyramids, it is better not to get involved or be interested in such platforms. Especially if you do not understand the types of cryptocurrencies, do not know reliable wallets and exchanges, or do not understand the meaning of the technologies behind the project (if any).
The third type is a little more difficult if you haven't found any signs of a pyramid. To get started, go to the table of TOP cryptocurrencies by capitalization (if it takes longer than 5 seconds to load, refresh the page) and find it in the rating. Anything below position 100 is a dubious investment unless you are a professional. As a rule, shit coins are not traded on popular exchanges, or have tiny trading volumes on unknown trading platforms. If the coin’s rate chart does not change over time, it means it is not listed on the exchange at all.
conclusions
Cryptocurrencies by their nature are not pyramids and periodically succumb to the bubble effect. You can only deceive a person who does not understand the essence of the blockchain and does not understand digital assets. Our educational portal was created precisely for the purpose of ensuring that novice investors receive the necessary level of knowledge and do not make rash payments.
According to such schemes, you can sell candy wrappers to children for real money, and crypto has nothing to do with it. But, there is one big BUT.
Cryptocurrencies are poorly regulated by the state and often there is no such definition in the law. The pyramid asks you to buy Bitcoin and invest it in their project - they take your real digital asset and either give you candy wrappers in the form of a shit coin, or give you nothing. From the point of view of the law, nothing was stolen from you, because there is no such thing.
In Russia, on January 1, 2022, a law on digital financial assets (digital financial assets) was issued, for which basic definitions have already been given. And there are even precedents for the arrest and return of cryptocurrencies to victims, but the legal framework is still extremely weak. Therefore, all your hope should be only on you.
Mavrodi syndrome
Anyone who works with cryptocurrencies has encountered the judgmental position based on the thesis “cryptocurrencies are a pyramid scheme.” Unfortunately, the memory of the pyramids of Sergei Mavrodi is still alive and people often refuse to see the differences between these two diametrically opposed directions.
Despite technological progress and the availability of financial education, one thing has remained unchanged - people continue to believe in the ability to get rich quickly without doing anything. As a result, modern pyramids continue to successfully collect money along the path trodden by Mavrodi.
There are pyramid schemes that have not missed the opportunity to take advantage of the popularity of cryptocurrencies by providing their users with access to investing in certain coins. In particular, the well-known Cashbury pyramid followed this path, having managed to cast a shadow on Bitcoin and Ethereum.
As a result, a negative attitude towards this phenomenon is created in the minds of people who do not fully understand the principles of how cryptocurrencies work. The logic is usually based on connections to fraudulent organizations.
Cryptocurrency projects that are often accused of working on the “pyramid” principle include Tether. The reason for such statements lies in the lack of evidence that stablecoin representatives have a sufficient number of US dollars to back the tokens they issue.
Speaking about Bitcoin and other cryptocurrencies, one of the main arguments in favor of reinforcing the status of a “pyramid” is the presence of a so-called “bubble”. Its explanation is demand disproportionate to the real value of the asset, which artificially “inflates” the price. At the moment of “saturation” of the market, a period of loss of previous interest begins, which is reinforced by the beginning of a correction inevitable after rapid growth. As a result, the “bubble” begins to deflate, and the price goes on the path of searching for its real values.
By the way, Sergei Mavrodi managed to share with the public his thoughts on the possibilities of Bitcoin, designating cryptocurrencies as “exclusively speculative instruments.”
