I know the term but I’ve never actually been able to understand what it is and what happens in one
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It’s a scam. Usually it is set up to look like a mostly legitimate business, but exactly what they do and how they make their money is glossed over. They have nice brochures, pictures of some office building somewhere, and a bunch of snazzy looking growth charts and financial projections.
So you meet Bob. He says that you need to invest in this new company, HyperGlobal Consolidated Inc. They’re a technology and investment company, and they use the latest in blah blah blah (fill in buzzwords here) new strategies to outperform the market. You should invest your money now, get in on the ground floor. Then Bob tells you that he invested $50,000 in this company six months ago, and he’s already made $250,000. “That’s how fast we’re growing,” Bob says. And you can see that Bob dresses in nice clothes, and drives a fancy car.
Pyramid schemes promise GIANT profits. They are really tempting because you like the idea of being rich in six months, and there’s a sense of fear that if you wait too long, you’ll completely miss out. “This is a once in a lifetime opportunity,” Bob says.
So now you take all your money and you give it to Bob. You might even take out a loan to invest more. And then Bob gives you an investment packet. It’s a bunch of copies of those nice brochures, pictures of office buildings, and snazzy growth charts. You get big boxes of all the same promotional materials that Bob gave you. And Bob says “now we need more investors to help our growth. We’ve got our new data center that’s going to open in India next year, and the more investments we get, the larger it will be and the faster we can calculate numbers, and the more money we will make”.
*This is all bullcrap though.* There is no data center in India. There is no nice office building somewhere. The company isn’t actually doing any real investing. They haven’t figured out this one cool trick that Wall Street brokers hate. They aren’t building cars, or buying real estate, or playing the stock market. They are just pretending to do so. What they’re really doing is pocketing your money as soon as you hand it over. It’s just simple fraud.
Bob gets a cut of that. And if he convinced 10 people in the last six months to invest $50K each, that’s how he managed to make $250K in the same time span. The thing is, Bob may not even know that it’s a scam. He could legitimately think it’s a great company. The people who set it up know that it’s a scam, but the people under them don’t necessarily know. But since they are just counting your investment as “profit”, they can show amazingly high returns very quickly.
Now many people are generally familiar with the concept of a pyramid scheme, so the real trick is to carefully disguise it. It shouldn’t be obvious at first glance that this thing will never work. Any good fraud needs a nice cover story, after all. But at the end of the day, they’re all the same. The company never had any way to make a profit.
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