Ponzi schemes are, basically, fraudulent investing activities that work by paying off older investors with money collected from new investors. These fraudulent schemes are usually presented as investment management services, where participants believe that the return they will gain is a result of a legitimate investment.
Impostors often lure investors by promising quick and/or high profits, but in reality the fraudster is basically robbing one investor to pay the other. The problem with such a scheme is that investors on the backend will not be paid at all.
The Ponzi scheme is named after Charles Ponzi, an Italian swindler that moved to North America and became famous for his money-making fraudulent system. In the early 1920s, Ponzi managed to defraud hundreds of victims and his scheme ran for over a year.
Is Bitcoin a pyramid scheme?
Some may argue that Bitcoin is a big pyramid scheme, but this is simply not true. Bitcoin is simply money. It is a decentralized digital currency that is secured by mathematical algorithms and cryptography and that may be used to buy goods and services. Just as fiat money, cryptocurrencies can also be used on pyramid schemes (or other illicit activity), but that doesn’t mean crypto or fiat currencies are pyramid schemes.