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There has always been financial fraud dressed up as investment and the most common online schemes now seem to be pyramid schemes, matrix schemes, Ponzi schemes and more. Some people think that many schemes marketed as MLM (multi level marketing) are close to being fraud but for others these are considered to be perfectly good business.


In some cases these frauds started as attempts to make money legally then went bad but in most cases they are intentionally fraudulent and it’s a question of time until the schemes end or collapse and most if not investors lose their money.

Q. Why are these schemes still popular?

Offering an easy way to make money will always attract attention and people willing to put aside their doubts and try it. Many of the schemes are wrapped up in complexities that defy understanding (deliberately) so hide their fraudulent nature. And many of the schemes have expert Marketing that draws in even sceptical people.

They all have the same basis – offering people a simple way to make a lot of money but that money essentially comes from other members also seeking money. Hence for every ‘winner’ there have to be ‘losers’

The mechanism of the schemes do vary as does the Marketing spin used to sell them.

Pyramid schemes are illegal as are Ponzi schemes. Matrix schemes and MLM may be legal depending on how they operate.

Pyramid Schemes

These are largely straightforward as they tell you that in order to make money you must recruit more members and they recruit more members and so on. Each time a new person joins you get a commission.

People join in order to make money, but the inherent problem is that the only money in the scheme is from new members also seeking to make money.

So, in time it will collapse as it’s impossible to keep recruiting enough people to make the current members rich.

You join a pyramid scheme and pay your entrance fee (usually there’s a monthly fee as well) and you’re told to recruit more people under the same conditions. You recruit new members and get a cut of the fees they pay and they are told to recruit more members and so on. You get commission payments or maybe 3 or 7 or even 10 levels of new recruits. On paper this can be calculated as a great deal of money you can earn but the scheme just cycles money between members and doesn’t create wealth in any form.

To create a semblance of legality, Pyramid schemes often contain something that the new member is reportedly purchasing (such as ebooks) but these typically have little value. Basically this is a system where one person at the top recruits a lot of people who invest in something and they only see a return by getting more people to invest in it through them. The people at or near the top of the pyramid may make a lot of money and use that to entice more members but it cannot continue and the pyramid crashes to earth.

Matrix Schemes

A matrix scheme is a business model where members pay for a specific  product and the opportunity to be added to a waiting list for a product of greater value than the amount paid.

So, it sounds like a pyramid scheme but with the addition of real products and a more complicated process for actually getting them.

The cosmetics company Avon used to be purely door to door sales and private parties then they dabbled in matrix schemes by letting their reps recruit and train more reps and win prizes. This has tarnished the good name of Avon cosmetics but they have adapted their scheme to remove the worst excesses.  

The operation of matrix schemes varies, though they often operate similar to pyramid schemes. To move upward in the list, a person must wait for new members to join or refer a certain number of people to the list. This is accomplished through purchasing a token product of little value such as ebooks. When a pre-defined number of people have purchased the token product, the person currently at the top of the list receives their reward item, and the next person in the list moves to the top. The rewards for those at the top of the matrix list are usually such as  HD televisions, laptop computers, mobile phones, holidays and even new cars. .

In many cases, the token product alone could not be reasonably sold for the price listed, and as such legal experts claim that, regardless of what is said, the real product being sold is the "reward" in question in those situations.

These are always complicated and while some people win, many will end up with less than when they started.

Ponzi Scheme

A Ponzi scheme is where you believe you are investing in company shares or money markets or similar run by a licensed reputable business and they take your money and report substantial growth over time that makes you want to keep your money in that investment.

However, the company lies about that growth and to cover up their failure to deliver they use investment money from other investors. The difference each period between what they actually have and what they claim to have grows until it becomes unsustainable and the scheme collapses.

Analogy: I want some money to invest in the stock market, confident I can make big profits, so I borrow £100 from a friend named Paul and tell him that next week I will repay him £120.

When next week comes my investments didn’t turn out so good and I don’t have the cash to repay so I borrow £100 from each of two more friends with the same promise of repayment. I use £120 of that new cash to repay Paul so he’s happy and made a profit and I’ve got £80.

When the following week comes I now have to find £240 in repayments so I borrow £100 from each of 3 new friends with the same promise of repayment. And so it goes on. People in the scheme early may make a profit but sooner or later it will collapse and a lot of people lose out.

The only way to keep things going is to keep recruiting new members and use their money to pay off current investors.

Sometimes investment businesses start out with good intentions but turn into Ponzis when they try to cover up losses.


All of these schemes – Pyramid, Matrix and Ponzi promise money for nothing and some people get that but for most investors it turns out to be a scam that they are on the losing end of.

Stay clear of any scheme labelled as Pyramid or Ponzi and do not invest in any scheme without independent financial advice.

If you have any experiences with scammers, spammers or time-wasters do let me know – go to the About page then Contact Us.


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