Most people who are unfamiliar with how forex trading works usually are pretty skeptical about this method of income. They believe that it must be some sort of scam as there is no way you can earn money this way. In this guide, we shall get to the bottom of whether or not forex trading is a pyramid scheme or a Ponzi scheme!
What is a Pyramid Scheme
A pyramid scheme is a fraudulent business model in which a so-called marketing organization falsely offers to assist you in earning significant earnings in return for your participation in the plan and the recruitment of new participants.
On the surface, a pyramid scheme may look like a genuine business that sells products or services. Nevertheless, the primary objective of these schemes is almost always to increase the number of people participating in the scheme rather than increase the amount of money made through product sales.
New participants are often classified as either investors, salesmen, agents, or distributors, or a title that is somewhat interchangeable with one of these terms. Participants in pyramid schemes are typically required to pay membership dues and commissions in addition to purchasing predetermined quantities of product inventory on a monthly basis.
This is done in order to maintain their standing in the firm. The actual process of promoting and selling things receives just a small amount of focus.
What is a Ponzi Scheme
A fraudulent investment plan known as a Ponzi scheme is one in which current investors are paid using monies gathered from new investors. Those that arrange Ponzi schemes will frequently make the claim that they will invest your money and earn huge returns with little to no risk. However, in the majority of Ponzi schemes, the con artists do not really invest the money.
Instead, they utilize it to pay back those investors who came in earlier, and they could even retain part of it for themselves. Ponzi schemes require a steady influx of fresh money in order to continue operating because they generate very little or no legal income.
These schemes typically go through when it becomes difficult to recruit new investors or when a significant proportion of existing investors pay out their positions.
Is Forex Trading a Ponzi Scheme?
Essentially, Ponzi schemes are just fronts for fraudulent investment management businesses. People will put their own money into the system rather than paying a fee to participate, as is customary in Pyramid schemes. The proprietor of the scheme will try to persuade potential investors to put their money in the hands of a forex expert of some type, who is more commonly referred to as a forex money manager.
There are many different genuine forex money managers out there, and each of them trades a pool of their client’s money in exchange for a fee in addition to a share of the profits made. The key difference, though, is that there is no initial investment required in a Ponzi scheme. The early investors will not receive any return on their money. Rather, the schemer will compensate them out of the money that is invested by later investors. It is possible for the program to continue if there are continuously fresh investors.
Is Forex Trading a Pyramid Scheme?
The recruitment of new members who are willing to pay into the plan is how pyramid schemes generate revenue. The proprietor of the forex investment pyramid scheme does not generate money via actual currency trading but rather through the fees that new forex investors are required to pay in order to participate in the scheme.
It is referred to as a pyramid due to the fact that the second layer of people recruited into the scheme will then hire an additional layer of new people to participate in the plan. When new investors sign on, those who are already at higher levels in the pyramid gain more money overall. If you are detected engaging in a pyramid scheme, you will most likely be sentenced to jail time. These scams are considered illegal.
How to Spot a Forex Trading Scam
There are a couple of different ways you can spot a forex trading scam. Some of the most popular ways are as follows:
Unbelievable Profits
Even while foreign exchange trading has the potential to generate very high profits, we shouldn’t put too much faith in brokers or consultants that guarantee a return on investment of more than 10 times the initial investment in a very short period of time.
This kind of revenue is not unattainable, but it is incredibly hazardous, and you shouldn’t engage in it unless you are a professional trader with a significant amount of expertise in the field. Because of their greed, the majority of rookie traders make the mistake of falling into this trap of great profits. Trading forex successfully demands a significant amount of patience since impatience frequently results in financial loss.
Easy Money
You should steer clear of brokers and experts that promote the idea that foreign exchange trading takes nothing more than an investment or that it is a straightforward process. Because of this, new traders are drawn in under the false impression that they would be able to make a significant amount of money with little to no effort.
This does not happen very frequently at all. They just want you to believe that it would be a simple process so that you will sign up with them as your sponsor, and they will get a commission. You’ll quickly understand that it’s a complicated process, but they won’t provide you with any sort of direction.
No Regulations
You must restrict yourself to registering with just those brokers that are a part of a regulating body. In order to make absolutely certain that no fraudulent business is being conducted, it is generally advised that the broker you choose should be licensed by at least one tier-one regulatory agency.
This is done to ensure that there is no fraudulent activity taking place. In a similar vein, in order for you to have faith in your trading advice, they need to have a solid body of reviews behind them. Due to the absence of these factors, the likelihood that they are legitimate is reduced.
Popular Forex Trading Ponzi Scheme
High Yield Investment Programs, sometimes known as Ponzi schemes, collect funds from members of the public who are not paying attention and use those funds to make investments in forex trading or other markets under the pretense that the profits would be distributed equally among all of the participants. They function similarly to funds in that capital is pooled together before being invested on behalf of customers.
They also begin paying returns on investment to the early contributors and make the promise of very large returns on investment. Ponzi schemes are deceptive in that they appear to be genuine since they recycle the money that was contributed by the original donors and use it to pay new contributors. This leads potential victims to believe that the scheme is real.
When investors observe the growth of their initial investment, it encourages them to contribute even more of their money to the plan. The Ponzi scheme operators stopped making payments after amassing enormous sums of money from their victims, and then they shut down their operations and fled the country.
Types of Forex Trading Pyramid Schemes
There are different types of pyramid schemes you can find in the forex industry. Here are the most popular types of pyramid schemes being used today:
Social Media Influencers
You will frequently come across influencers advocating forex trading on various social media platforms. This is due to the fact that forex trading has lately become rather popular. These influencers typically do not know what they are talking about, and they are typically paid by particular brokers to promote the service of those brokers on their respective platforms.
These influencers will post on their social media accounts about how much money they are making with a particular broker. They will then proceed to tell all of their followers that they have a sign-up code that will provide them with a significant discount when it comes to creating a new account, and they will share this code with them.
Every person who uses the influencer’s referral code to sign up for the service will earn the influencer a commission in the amount of their choice. After you have created an account, you will shortly be able to access your very own reference code to distribute to anyone who joins under you. This cycle never ends and is essentially a large-scale pyramid scam in which you may make a quick buck if you have a large following.
Trading Advisors
When you are well established in the world of trading, you will get acquainted with a large number of people who also engage in trading. You’ll get some very excellent recommendations from some of them, but you’ll also come to deeply regret meeting others. Someone who approaches you and asserts that they are a trading advisor is another possibility.
Someone who acts as your trading adviser will provide you with signals for profitable positions and may even manage your account on your behalf. They want to charge a respectable sum of money on a monthly basis for their services. Before agreeing to use such services, it is critical to conduct a history check on everyone involved.
Some trading experts will recommend that you work only with a particular broker. It’s possible that they’re doing this so they can get commission from the other broker for persuading you to utilize their services instead. The vast majority of the time, these trading gurus don’t even provide their own signals to their clients. The majority of the time, you’ll discover that they are following the signals of somebody else, who, in turn, is following the signals of somebody else.
This cycle keeps going deeper and deeper into infinity. Knowing about this particular kind of pyramid scam is necessary in order to stay away from participating in one. Make certain that your trading adviser can demonstrate its legitimacy by pointing to a solid customer base that supports the services they provide.
Unregulated Brokers
When a new trader first starts out, one of their primary worries is whether or not the broker they choose is legitimate or not. We are aware of the anxiety that might be caused by making a financial investment in something unfamiliar. Because of this, we strongly advise you to always conduct a thorough investigation into the regulations and regulatory organizations that pertain to the broker that you select. After all, the very last thing that any of us would want is for someone to steal the money that we have worked so hard to obtain.
You just cannot fathom the number of occasions that we have witnessed inexperienced traders put their money with a dishonest broker only to have that broker abscond with their money. When you find a broker that interests you, you should always examine their ratings on several sites. Listen in on what some of their current or former customers have to say about the quality of their service.
Be wary of websites that post phony evaluations since they are compensated by the broker to do so. These brokers will often offer a variety of programs in which you may participate in exchange for a predetermined fee. After that, they will provide you with the opportunity to do the same for people working under you by using your own personal reference code.
The cycle repeats indefinitely, giving the appearance of a forex trading pyramid scheme. The majority of individuals do not know enough other people who are interested in trading. This is why they do not make very much money via these methods.
Final Verdict
There is no doubt that forex trading has some elements of a pyramid or Ponzi scheme. However, every industry has its good side and bad side. As long as you’re careful to avoid falling into any of the scams, you should do just fine in this industry.
If you’re looking for some extra help with your forex trading account, ForexGDP provides perfect analysis of forex signals that enable you to place positions without any fear or doubt. Up your risk management game today by subscribing to our Telegram or WhatsApp group!