What is a financial pyramid and how does everything work?

When an investment project collapses, it is often said that it was a financial pyramid. However, not everyone realizes what financial pyramids are, and whether any unstable business model can be such.

Therefore it is necessary to understand the terminology, and at the same time to consider the various financial pyramids, to find out whether you can earn on them, and if you can, how?

Financial pyramid and its types

Multi-level financial pyramid

The multilevel type financial pyramid is based on the fact that each newly arrived participant makes an entrance fee. This payment is distributed between the participant who invited the novice and those who invited the invitee (by earlier participants of the pyramid). After the installment, the newcomer is obliged to invite a few more people, their contributions will go in his favor. So it goes from level to level.

According to this scheme, financial pyramids bring in incomes up to 500% and higher, depending on the rules established by a particular financial pyramid. The reason for the collapse of the financial pyramid is that the number of participants in it should grow exponentially, and at this rate even the entire population of the country is not enough to provide the first 7-10 stages. As a result, investors who could not bring new participants are left with nothing.

If you think that the money of depositors is always deposited with the organizer of this whole scheme, then you are mistaken. He himself may as a result of his activities go bankrupt. Naturally, not to such an extent as to go around the world, but just so much so that he does not have the means to pay a profit to all participants in the scheme. Naturally, when it starts to "smell fried", the organizer prefers to disappear, and the financial pyramid stops working (scam).

Ponzi financial pyramids

This scheme is named after one ingenious Italian, Charles Ponzi (Ponzi), who created the first Financial Pyramid in the United States.

The financial pyramid under the Ponzi scheme does not oblige the client to attract new participants. The creator pays for the first investors with personal funds, after which people learn about the new version of high-yield investments and the financial pyramid begins to receive money. The organizer pays for investors with money from new investors, and this scheme works for a certain period of time.

Investors expect to receive more funds than they have invested, but the company does not conduct anything other than fund-raising, and when the number of investors begins to fall and the financial pyramid collapses, the organizer appropriates all previously made contributions and hides.

According to this scheme, most modern financial pyramids operate. The action plan is very carefully planned by the creator of the pyramid.

Comparison of multi-level financial pyramid and Ponzi schemes

The main differences between these 2 types I resulted in the figure below.

Conclusion: any financial pyramid is most beneficial for its creator and first participants.

Interesting examples

Financial pyramid MMM

Perhaps the most acclaimed financial pyramid MMM can be considered. Created this financial pyramid, working under the Ponzi scheme - Sergey Mavrodi. The MMM financial pyramid worked for almost a year and ended up being arrested by Mavrodi due to tax evasion.

Has Mavrodi himself appropriated all the depositors' funds? I think no. It is very difficult to trace the real author of the MMM pyramid, since the chain from a fairly enriched person to an individual who has lost everything is too long.

Personally, I think that Mavrodi was just the right performer, and the MMM financial pyramid itself was a screen for the redistribution of funds and power in post-Soviet Russia. It is also worth noting that Mavrodi did a great service to the Russian government by withdrawing unsupported money from the population, thereby reducing inflation. That is, if we talk about macroeconomics, the financial pyramid of Mavrodi played into the hands of Russia, as a state as a whole.

Scam Madoff

In the United States, for example, financial pyramids were organized more than once, and of course, at the most inappropriate moments, they burst. The most acclaimed US financial pyramid is the so-called scam of Bernard Madoff, with a turnover of $ 17 billion. Maidoff himself admitted that he relied on the model of the Italian Ponzi scheme.

Until a certain time (namely, from 1990 to 1995), his investment fund actually worked and was TOP-1 among US investment funds. Madoff was also a co-founder of NASDAQ. This authority just allowed the fund to increase such large volumes. Many were afraid to withdraw from the Madoff investment fund, as there were so many people who wanted to invest, and then they would have to wait in line to invest again.

In 2008, Madoff’s investment fund held about $ 17 billion.
Madoff was handed over by his sons, to whom he told that already as 13 years old his investment fund is a financial pyramid. If not for the sons, then who knows how long the pyramid would have lived?

IPhone Pyramid

The financial pyramid can be built on the love of Russian citizens for fashionable "gadgets." In 2011, a resident of Moscow spread rumors about his connections at customs. Claiming that he had access to the confiscated goods, the man offered his clients the latest iPhone models at very low prices.

The main condition of the transaction is 100% prepayment. Having received money from the first customers, he bought phones on the market at a normal price and sold them to customers at a lower price. With lightning speed, rumors about such an "attraction of unheard of generosity" spread across Moscow, customers stood in line for "iPhones". One of the clients of the “IPhone” pyramid made an order for 5 million rubles. The creator of this financial pyramid disappeared with money and it collapsed. But a year later he was found and arrested.

The financial pyramid of drugs for AIDS

Financial pyramids are sometimes organized by famous people. One of them was invented by Barry Tannenbaum - the grandson of the founder of the company Adcock-Ingram (pharmaceutical company). Offering customers a crazy return on investment in anti-AIDS drugs, he collected about $ 1.5 billion and went into hiding in Australia. Naturally, the financial pyramid collapsed. By the way, he has not been punished for the scam and categorically rejects all accusations against him.

Financial pyramids on the Internet

When such a wonderful thing appeared as the World Wide Web, financial pyramids began to appear on the Internet.

When discussing financial pyramids on the Internet, the term "HYIP" comes first to mind.

HYIP is an investment project on the Internet, which has no weighty evidence of real work (reality of the legend), but there is no direct evidence that this is a financial pyramid.

My view on financial pyramids

A financial pyramid is a money bag into which everyone dumped their money, and then they were distributed in a different way.

Financial pyramids can bring income to those people who managed to stand on the top of the pyramid after the organizers. And if these people represent how to make money on the pyramid, then they will withdraw their funds in time. Then everything "earned" will remain with them.