A pyramid scheme is a financial scam where a small group of early investors profit, and everyone who enters later loses their investment. This loss happens because there isn't anything invested despite these scammers' promises. Instead, each time someone invests in the scheme, their investment is used to pay people who put their money in earlier. We'll give an example below.
Imagine someone offered you an incredible investment opportunity with the chance to earn at least a 10% return on your money over ten months. Even better, they guaranteed that no matter what happened, you would never lose your initial investment. Based on this promise, how much would you be willing to invest today? For the sake of our argument, we'll assume you'd be willing to risk at least $10.
As promised, you earn $1 per month, but after ten months, the scammer tells you there was a downturn in the market. You got your $10 back, but you didn't receive more. You feel like at least you didn't lose money. But in reality, you only gave someone $10 who paid you back at the rate of $1 a month. They never made any investment. Instead, they used your money to pay you back. But you don't know this.
From your perspective, you could have lost all $10 of your money. But you didn't. You got your money back and enjoyed the thrill of a bit of risk and hope along the way - much like a gambler feels. And that's what makes the scam work. Because now you believe you can trust this investor. After all, they protected your money. Since you didn't lose anything, you'll be more likely to reinvest, helping the scammer build a reputation as an investor. However, this is where the dark side of the scam starts.
Now that the scammer has artificially created trust, more people will invest based on the logic that the first person didn't lose money, so neither will they. If you lost nothing, many people believe their investment was safe, even if it wasn't profitable. Those with a financial education will know that losing nothing is not the same as gaining something. These people will be unlikely to reinvest. But those who have little to no financial education will not be aware of this.
They will think their investment might make money the next time. After all, they didn't lose any money. So many of them will reinvest. This stage is where the scam starts to take off, and why it's called a pyramid scheme: Now, the scammer runs several scams at the same time. So, the first people who invested their $10 start making money because the new investors are paying them. And each of those people is further supported by every investor who joins after them. But there's still no investment.
Over time large sums of money are invested by different groups of people from all walks of life. Every new 'investor' adds cash to the bottom of the pyramid. These funds pay people higher up the pyramid, and as new people join, more money enters the scheme.
In time, the scammer, who has always been at the top of the pyramid, disappears with the money. Anyone late to invest or too far down the pyramid makes no money and loses everything they invested. Meanwhile, the scammer is gone. Maybe they left the country or hid somewhere, but the money's gone. And no one can get it back.
In Georgia, three recent companies stand out for financial schemes like this.
Tesla Video Media
This company was one of many platforms offering commissions to people in the developing world. Like all pyramid schemes, they offered users impossibly high bonuses and rewards for referring new customers. However, in this case, the technique involved cryptocurrency.
Users who bought in earned money for each new referral who also bought in. Tesla Video Media repeated this process from one victim to the next until no one was left to invest. When that happens, it's called market saturation, and once a market reaches saturation, sales slow or stop altogether. With crypto, this means it loses value, sometimes drastically.
In the case of Tesla Video Media, their market collapsed. But the person or persons at the top of the pyramid still got paid. They transferred more than eleven million dollars of investor money to two crypto wallets associated with the company. However, the individual who owns the wallets and is behind the theft of the crypto investments remains unknown. Worse for Georgia is that an estimated 75-80% of the users were Georgian, meaning the citizens of Georgia lost at least nine million dollars to this scam.
STEPN
Another popular company in Georgia, STEPN was identified early on as a crypto pyramid scheme. Despite this, it still functions today. Their concept was relatively simple. Users would use cash to buy an NFT 'sneaker' or shoe necessary for earning crypto through the app. Not having shoes meant you could not make money. The plan seemed simple enough, but it was nonetheless a pyramid scheme.
It was a pyramid scheme because the company's crypto was its own.
It was only valuable if people were buying and trading it.
Therefore, the early adopters could cash out – selling their shoes back for lari. But when new users stopped coming in, and old users tried to cash out, the cryptocurrency crashed. Many people who invested in it lost their money and time. Financial Company Georgia LLC
No list would be complete without this company. They began operations in 2008. But by 2017, they had big financial problems, which soon spiraled into even more significant legal issues. As is typical of pyramid schemes, they offered significant cash returns in exchange for investments. They accomplished this by taking out loans from people and companies.
Financial Company Georgia borrowed multiple sums of money totaling approximately 220 million GEL.
They promised to return much higher interest payments than customarily offered by lending institutions, and people believed them. Tremendous sums of money were invested in the scheme, but in the end, the company collapsed. The owners and top associates were tried in court and imprisoned for their crimes. But the investors never recovered their funds.
While the above examples are by no means the only ones, they illustrate a pattern savvy investor can quickly and easily identify. Promises of great returns with little to no visible risk, followed by a spike in new investors flooding the company or institution with fresh capital and ending in complete financial collapse. But Georgia is not unique in being victimized by these schemes, both domestically and by foreign agents.
Pyramid schemes are a problem around the world. However, after reading this article, you should better understand what pyramid schemes look like and how to avoid falling victim to them. But there also are other scams you need to be aware of. Some are similar to pyramid schemes, and others are quite different but no less dangerous to your money. If you'd like to learn more about protecting yourself from them, check back for our next article…
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