What is a financial pyramid

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Definition of a financial pyramid

After the closure of a hype, one can often hear from investors – yes, it was an ordinary financial pyramid. Here are just such words, as a rule, you can hear only from newcomers, because rarely do any of them think that any business model is inherently a financial pyramid. So, what can be called a financial pyramid and how does it affect the financial condition of an investor?

What is a financial pyramid? First of all, this is a certain economic structure, the basis of which is the constant attraction of new participants, which bring the material basis to the structure. New depositors came – old ones received payments. As a rule, in most people the financial pyramid is associated exclusively with fraud. However, practice shows that ordinary business activities can also easily turn into a typical financial pyramid. Consider a simple example – the entrepreneur did not calculate the profitability of his own business and the company, accordingly, gradually goes into minus. At the same time, the owner does not have the financial ability to repay current loans or pay off investors. In such circumstances, his only option is new loans that go to pay off old debts. And when the moment comes when the total amount of payments exceeds new arrivals, the whole pyramid collapses.

The principle of operation of the financial pyramid

As we have already mentioned, the structure of the financial pyramid is built solely on new investors. As soon as a newcomer enters the pyramid and pays his investment contribution, his funds are immediately distributed among investors who entered earlier. Accordingly, in order to earn money, the new investor must also invite new participants who can bring him profit.

If everything is so simple, then why are financial pyramids collapsing? To answer this question, it is enough to recall the lessons of mathematics in which you were told about arithmetic progression. Each particular period, twice as many participants should come to the financial pyramid than the previous one. Thus, even covering the entire population of the state, sooner or later, the pyramid will not have enough participants to pay for the last round. And then scam happens.

The danger of financial pyramids

The negative reaction to the financial pyramids of each person (especially a resident of our country) is understandable. But we consider it our duty to clarify something. In fact, our daily lives are already surrounded by financial pyramids.

Insurance companies, banks, pension funds – these are the real financial pyramids that we regularly encounter. Explain with a simple example. Most people sincerely believe that a bank deposit is the most reliable way to save their money. Not really. Simply, the bank offers up to 10% per annum on deposits, and on loans about 20% -30%. The difference between the percentages is their earnings. Moreover, if all depositors want to return their deposits at one time, the bank simply will not be able to pay them – they will never have such funds. By the way, pension funds work on the same principle. Count yourself – how much for 30-40 years of work experience do you give to the state? And how much of this amount will the state return to you after reaching retirement age? Perhaps, in order for the total amount of the pension to cover all deductions before it occurs, one must live about 120-130 years.

Summarizing

The financial pyramid is a typical economic scheme that has been successfully operating for hundreds of years. Of course, each of them will be destroyed sooner or later. If you want to make a profit, a simple understanding of how it works is enough. Discard the hope of luck, analyze the current situation and only then think about the contributions.

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