Pyramid Schemes in the Crypto Space

When using crypto products such as wallets and exchanges, protecting the security of your assets is the No.1 priority. In “CoinEx Wallet Security Tips”, we will share some basic crypto know-how such as common scams, how to use crypto products safely, and blockchain security mechanisms from multiple perspectives to help you fully understand asset security and adopt enhanced protection measures.

As the blockchain industry evolves and becomes more widely accessible, it has become the target of scammers running pyramid schemes. They start to issue tokens and profit from greed, a human foible. These scammers encourage people to “recommend” their tokens to friends for quick returns, which are what we call crypto pyramid schemes or MLM (multi-level marketing) coins.

I. What are MLM coins?

MLM coins are a new type of Ponzi scheme disguised as cryptocurrencies. Such projects often promise “quick, exceptional returns” and encourage investors to “recommend” their cryptos to friends for returns. In this way, scammers could keep profiting from new investors who blindly follow suit.

II. The characteristics of MLM coins

1.Enrolling more investors

Asking investors to “enroll the next level of participants” is a key characteristic of MLM coins. As we all know, pyramid schemes are shaped like pyramids, and the returns distributed to participants at one level are derived from funds provided by those at the next level. As such, the pyramid would soon crumble if scammers cannot recruit more new participants to maintain their cash flow. Therefore, crypto pyramid schemes always need funds from new investors to keep the pyramid stable.

2.Always profits & no losses

MLM coins would normally ask participants to enroll more users by promising steady or exceptional returns. Scammers running such schemes often excel at marketing. Keenly aware of human foibles, they spread claims of “incredible returns” and “constant growth” in social media groups and forums to lure more victims.

As increasing participants flock in, the price of MLM coins would go up. However, the scammers would reject all withdrawal requests from investors, and the price would plummet if no new participants are enrolled. As a result, the bottom-level participants would bear the heaviest burden.

3.Website/App-based deals or offline transactions

In a crypto pyramid scam, lower-level participants often have to buy coins through the website or APP built by scammers. Sometimes, they would even trade MLM coins via online P2P channels or offline transactions.

MLM coins are rarely available on well-established exchanges as they cannot pass the listing review. To restore confidence among investors, scammers would list their coins on an obscure trading platform. Sometimes, they would even build their own platforms.

4.Starting from friends

Generally speaking, MLM coin organizations would first target the friends of their participants and conduct promotional campaigns via social media platforms such as instant messaging and SNS software, targeting the relatives, friends, colleagues, or other acquaintances of participants.

5.Garbage packaged as “gold”

MLM coins are sustained by constant new enrollments. Like water without a source, such cryptos have no real value. Moreover, MLM coins are generally packaged as “gold”, with exaggerated promotions. Some MLM projects would even fake promotional documents in the name of celebrities or institutions.

6.Centralized projects without open-source codes

Most MLM coins don’t even have source codes, let alone open-source codes, and those that do are often backed by plagiarized codes, which is obvious to tech-savvy users. Moreover, such scams are often run by central entities that could issue any amount of crypto they like. Basically, MLM coins follow no rules.

III. How to guard against MLM coins?

As the blockchain industry matures, it has become increasingly easier for us to guard against and identify MLM coins.

1.Trade cryptos on well-established exchanges

Well-established exchanges like CoinEx are known for their strict listing process. Such exchanges would carry out all-encompassing reviews to assess cryptos to be listed on their platforms. Clearly, top exchanges would never approve the listing of MLM coins. In this sense, such platforms screen out the risky cryptos for users. Therefore, trading cryptos on a well-established exchange represents a great way to avoid MLM scams, and we should stay away from exchanges with a shabby background.

2.Avoid tokens that offer commissions for enrolling more investors

The most typical feature of MLM coins is that they would ask users to constantly enroll the next level of participants. As such, we should stay away from tokens that offer commissions for enrolling more investors because there is no such thing as free lunch.

3.Ignore tokens that promise “constant growth”

In the crypto market, price swings are normal. No crypto can always grow without ever falling, and even the best projects also plummet from time to time. As such, if a cryptocurrency promises constant growth, it is probably run by scammers and should be avoided.

To sum up, we should be careful with crypto investments that demand membership fees and offers commissions for enrolling more members. In addition, investors should also avoid becoming victims of such scams by guarding against projects that seek to enroll more participants and promise exceptional returns via flyers, text messages, phone calls, SNS software, and recommendation among friends.