Twitter Stephen Diehl expresses:  Let’s talk about how pyramid schemes like Bitcoin have historically exploded and the public damage that happens when they do.

A pyramid scheme is a type of fraud whereby investments are solicited from the public on the pretense (implicit or explicit) of offering high returns on their investment. Normally returns far beyond that of normal markets.

The secret sauce that makes it all spin is that returns are paid to the early investors out of the funds received from those who invest later.

From an accounting perspective, the scheme is insolvent from start. The assets exceed liabilities and since the scheme has no cash flow, other than bringing in new investors, the scheme requires constant recruiting and promotion to sustain the illusion. Sounds familiar?

Later investors are drawn in by cherry-picking anecdotes about the returns of early investors while ignoring (often due to obfuscation) the macro cash flows of the entire scheme.

Eventually, when late investors try to get their money out of exchanges or brokers they discover the truth about the scheme being insolvent. The operators of the scheme usually flee away with the remaining funds and it all quickly collapses leaving a wake of victims.

Several large “funds” emerged that promised to take retail investment and use the funds to invest in other developing enterprises and infrastructure in the nation. They promised large yields with low risk, and the public leapt into these schemes without much due diligence.

People who are personally invested in a pyramid scheme will fight tooth and nail to legitimize it. They want to believe. Conmen don’t sell you facts, they sell you emotion. And naive investors will post-hoc rationalize nearly anything that promises them free money.

Not surprisingly, these schemes were indeed nothing but thinly veiled pyramid schemes that kept soliciting more and more public money until they eventually broke the entire economy, the government collapsed and the country soon descended into anarchy.

All throughout this era, the corrupt government stayed silent about the scams (just like the SEC and the federal government does today), adding fuel to the meme that the pyramid schemes were legitimate.

In today’s crypto “market” there is no longer a stigma associated with pyramid schemes. You shill your dog token of choice because you want it to go up, and that’s pretty much all there is to it. It’s naked pump and dump, no longer backed by any narrative of value creation.

The moral of this story is that a competent government, strong regulation, and a financially literate public are the only forces that can stem the frenzy before pyramid schemes damage economies and markets.

We need more people with the audacity to call out crypto pyramid schemes for what they really are: Economically unsustainable investment fraud that hurt innocent people and destroy lives.

Congressman Patrick McHenry back in 2019 when talking Bitcoin (BTC) stated it was “unstoppable,” adding: “We should not attempt to deter this innovation, and governments cannot this innovation and those that have tried have already failed.”