Between Charles Ponzi and Bernie Madoff, the history of pyramid schemes is rich, tragic and driven by one of the most powerful emotions — greed. While the forex market is far from a pyramid scheme, its development over the decades has attracted shady businesses. This article discusses financial pyramids in forex trading and lists basic steps that help avoid pitfalls and forex scams.
What is Forex?
Foreign exchange (forex) is a global, decentralized currency market. Through a network of international banks, it operates 24 hours per day, 5 days per week, with the Australian market opening and the U.S. market closing the week. Forex works by pitting the value of one currency against another, creating currency pairs. The most popular is the euro vs. the U.S. dollar, labeled as EUR/USD.
The origins of the modern foreign exchange market can be traced to the 1970s when the U.S. dollar officially started floating. Since then, the forex market has become one of the largest globally, with daily volumes exceeding $6 trillion.
What is a Pyramid Scheme?
A pyramid scheme is a business model that relies on perpetual and unsustainable growth. These schemes often promise high and fast returns to lure new members quickly. By deploying its funds to pay out returns for earlier members, the scheme continues to operate as long as there is an influx of new members. The scheme inevitably implodes when the growth slows down as scammers can no longer pay out promised returns.
2 Main Types of Forex Pyramids
The foreign exchange market grew quickly, especially after the rise of the IT sector through the 1990s. This trend also resulted in illegal business practices appearing in the sector.
Classic Pyramid Scheme
A classic pyramid scheme that relies on new members is slightly less sophisticated in forex Ponzi schemes. Two common themes usually repeat. The entity offers high monetary rewards and is vague regarding the details. Often these websites use financial jargon that sounds familiar yet makes no sense, like promising you will receive dividends from investing in forex. When paired with an aggressive affiliate program, these are good warning signs that this is likely a pyramid scheme at best and a straight-out scam at worst — especially if unregulated.
Although it appeared earlier throughout history, this scheme was named after Carlo Ponzi, a 20th-century fraudster. It involves collecting money from investors who believe that profits come from legitimate business activities and investment opportunities while they’re actually from other investors.
In forex, these scams might appear as percentage allocation money management (PAMM) scams, where fraudsters lure in investors by falsifying their track records and paying out the initial investors from new deposits. While there are legit PAMM services out there, counterfeit ones rely on unregulated offshore brokers that are key players in the scam. Controlling a broker allows the offerer to backload trades onto an investment account, faking the track record of success. Once the scheme attracts enough capital, the fraudster pulls the plug, feigning an account crash the same way they faked the initial profits.
This scam may look sophisticated; however, outstanding, consistent returns and a shady forex broker are tell-tale red flags.
How to Spot Financial Pyramid in Forex Trading
Regardless of the market, financial pyramids share common traits.
Promises of Ultra-High Profits
Pyramid schemes often play on traders’ desire to score high profits. If you see a promise of high returns and specifically about guaranteed, consistent percentage returns, you’re likely looking at a pyramid scheme.
Nontransparent Earning Structure
In contrast to other legitimate financial ventures, pyramid schemes have vague explanations about how the investment group operates. These can range from simple to extremely complicated, but they will not be transparent and straight to the point.
Deceptively Simple Ways of Earning Profit
Pyramid schemes appeal to investors’ laziness and a desire for easy profits. They do this by promising they’ll handle everything for you.
Multi-Tiered Affiliate Programs
Affiliate programs work by referring the product to another person for a fee. Meanwhile, multi-tiered affiliate programs add another dimension, as they pay earnings through tiered referrals. Every time a person recruits someone, they continue to earn commissions on anyone recruited by their recruit. This marketing approach can create exceptionally fast growth that perfectly suits pyramid schemes.
Depending on their base of operations, financial institutions work under a defined set of rules. These regulations are necessary for transparent operation on the market as well as customer protection. Brokers and other institutions publish documentation and provide checkable licensing numbers in regulators' registries. If this documentation is missing or if it is fake, it signals a clear red flag.
How to Avoid a Financial Pyramid in Forex Trading
Some pyramids can be surprisingly deceptive, but there are a few key things to pay attention to.
The first step is to look for regulatory documents and licensing and check the regulator’s registry to see if everything matches. Keep in mind that not all of the regulators are equal, but this step is preliminary.
Look for Reviews
Independent review sites and forums can be great sources of information. Look for elaborate, in-depth experiences from users and avoid vague, simplified ones — whether they’re positive or negative. Also, beware of the fake review sites that take on sponsored listings.
Income Generation is Transparent
Make sure you understand the business model well — where the money is coming from, how the company earns it and how it provides value for users. While complicated methods might be legit, extremely vague and simplified ones are most likely scams.
Review Internal Company Documents
Pay attention to the legal documentation, such as user agreements or terms and conditions. This is particularly important if the company offers bonuses that might be subject to a capital lock-up. These specifics are often buried in footnotes, so pay attention.
Be Sure the Company Has Legitimate Contact Information
Finally, look for the company’s contact information and check the address where it is located. Reputable companies are likely to have multiple offices in global financial hubs. If you find that their address is a P.O. box in the middle of nowhere, it is another clear red flag.
Forex Market Realities
While the forex market is not a pyramid scheme, it has attracted fraudulent businesses over the years. This article highlights the existence of financial pyramids within forex trading, including classic pyramid schemes and Ponzi schemes. Traders should be aware of red flags, such as promises of high profits and nontransparent earning structures and take steps to protect themselves, such as conducting thorough research and verifying legitimate contact information. By doing so, traders can have a successful trading experience with reputable brokers.
Best Legit Forex Brokers
The first step toward successful forex trading is finding a legit forex broker — a regulated intermediary to process your trades. Check out Benzinga’s broker offer in the comparison table below.
- securely through Forex.com's websiteBest For:Forex Trading in and Outside the U.S.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 68% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
- securely through IG Markets's websiteBest For:Forex Execution
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
- securely through eToro Forex's websiteBest For:Demo Accounts
CFD trading is not available to U.S. users. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
Frequently Asked Questions
Is forex an MLM?
Multi-level marketing (MLM) involves unsalaried, hierarchical sales teams that push products to expand the operation by recruiting additional unsalaried sales representatives. Forex is not an MLM, yet some gray area businesses around it can pursue such operations, giving a bad rep to the industry. Read more about the top 5 forex scams.
Is forex trading a legit business?
Forex trading is a necessity created to facilitate global trade. Some financial institutions have built their business models around that need. Furthermore, for some retail traders, forex trading is their sole income source.
Is forex a hoax?
Foreign exchange is not a hoax. It is an inevitable part of foreign trade, so it has been around ever since people started using money. In the last few decades, these transactions became largely electronic — creating many new businesses on the way. Unfortunately, this transition created many opportunities for scams, but that doesn’t undermine the legitimacy of the entire industry.
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About Stjepan Kalinic
Forex, Equity Analysis, and Financial Education