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Pyramid Scheme Simply Defined

Pyramid Scheme Defined

What is a Pyramid Scheme?

The only way to protect yourself from scams is to be properly informed. A Pyramid Scheme is defined as:

A fraudulent investment scheme to make money that requires the endless recruiting of new members for success. The new members, or recruits do two things. First they give a fixed amount of money to the recruiter. Then they must recruit new members to give them money, and the process continues.

The Fraud

This process is supposed to continue indefinitely such that everyone makes their money back, plus what they were promised. The problem, and thus the reason why this is a fraud, is that it is impossible for this to happen. There are not enough people in the world to make this possible.

People are deceived into thinking that they can make their money back plus additional money. Again the fraud lies in the fact that they cycle of recruiting cannot sustain itself. Eventually the scheme crumbles and fails. The people that are most vulnerable are those closest to the bottom of the pyramid. To illustrate who this point we shall turn to simple math.

Pyramid Scheme Math

To understand how it is impossible for a pyramid scheme to work and why they will always fail, we will turn to math. The image below shows a simple pyramid based on the power of 10. For our example of a pyramid scheme, we will use the same power of 10, but in the terms that a potential recruit may hear it as, you pay $100 when you get started, then all you simply have to do is recruit 10 more people who each pay $100. You will then get your $100 back, plus you will make $900. Simple and easy right?

Lets look at the math to see if it works.

Understanding Pyramid Scheme Math

Starting with the individual at the top, they have put no money in. They go an recruit 10 people who each pay $100. Those 10 people are then required to each personally recruit 10 people each bringing us to Level 3. This process could theoretically continue until somewhere between Level 10 and 11. With the world's population being just under 7 billion people you can see that the pyramid scheme would fail as there are just not enough people to recruit.

Pyramid Schemes Disguised

This is the pyramid scheme at it's simplest form. In most countries around the world, pyramid schemes are illegal. To get around this the criminals disguise their pyramid schemes in other manners. They can come across as gift-giving or forms of loans. Be alert to always look for what value, other than the money a recruit will receive for joining. If the only reward is the money, there is a problem.

The product must give an individual a reason to purchase and use the product. Be sure to understand what the value of the product is as well. If the only value that is given by the product is that is allows for more recruits, this too is a pyramid scheme in disguise.

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