Football Index is just a Ponzi Scheme
March 17, 2021
A UK company, Football Index, has financially collapsed over the last as its users have realised that the entire thing is nothing more than a pack of cards.
Football Index created a set of virtual assets linked to football players, and sold people shares in those players. The idea was that as a player becomes better at the sport, their share price would increase - meaning profit! But it’s pretty simple to spot the flaw here. No actual money is being generated by the system beyond what people put into it - it’s owners have effectively tried to create value out of thin air. This works, and the system can grow, for as long as there are people willing to put their money into it. But, as soon as the growth stops, and some people take their money, with profits, out of the system, the rest of the investors end up losing, as there’s no money left to pay them.
In recent weeks people have seen their share price drop massively, and some have talked to the media (opens new window) about losing thousands of pounds. It’s worrying that the UK Gambling Commission ever approved this scheme. There are similar schemes, like Bitcoin and Non-Fungible Tokens, that also rely on people seeing worth in the value of the system. At least with Bitcoin, on top of the speculators who buy it to speculate, there’s enough infrastructure to effectively use it as a way to transfer funds. And, of course, in the early days of Bitcoin the secretive nature of transfers meant that it was used on the online black market, the Dark Web, to securely pay for illicit purchases such as recreational drugs.
Here’s a quick primer on Multi Level Marketing Schemes, Ponzi Schemes and Pyramid Schemes, to help you know the differences between them:
A Multi-Level Marketing Scheme is a business model where people join a business through being invited by existing members. Once you have joined the scheme, you go out and sell the product that the scheme is centred on - be it cleaning products, make-up, books, etc - virtually anything can and has been sold as part of an MLM scheme. Part of your profits are paid to the people who introduced you to the scheme (your upstream), and their upstream and so on. You can make extra money from signing people up under you (your downstream), and you earn a portion of the money they make - and this incentivises you to sign up as many people as you can. Practically the only people who usually make money out of an MLM are those at the top, although enterprising, pushy people lower down the pyramid can also make money if they try very hard and suck other people in to the scheme below them. Most of these people will end up losing money during the time they take part in an MLM, but despite this people tend to think that if they work hard enough they’ll be the exception, and that they’ll turn a profit. Although these schemes, because most people lose money on them, are unethical, in most countries they’re legal.
A Ponzi Scheme is a financial scheme that makes false promises of profits, and requires a stream of new investors in order to keep the scheme going. Usually with Ponzi schemes lies are told to potential investors about the interest they could make from investing their money in the scheme. However, although they may have been told that their money has increased in worth, in reality the money is either sitting in a bank somewhere making little to no interest, or has been spent on buying the scheme’s creator a shiny new Porsche. The biggest problem for someone running a Ponzi scheme is that some people will eventually want to cash out their money, including the profits they’ve been promised. The scammer will often try to convince the investors to keep their money in the scheme, either by reminding them of the amazing profits their money is making them or by offering them an exclusive new tier of investing with even higher margins. For those who insist on cashing out, the scammer finds themselves having to escalate, signing more and more new people up to the scheme to bring in enough money to pay those who are leaving it. Eventually the whole thing will collapse.
A Pyramid Scheme, which is illegal, is a special kind of Multi Level Marketing scheme that has a lot in common with a Ponzi scheme. In a pyramid scheme there is either no product being sold, or the product is not a major income stream for its participants. The main “product” being sold in a pyramid scheme is the opportunity to take part in the scheme. This is not sustainable, as most people who sign up for the scheme will find themselves at the base of an ever widening pyramid - a place where your money has been paid upwards to those towards the top of the pyramid, and nobody is signing up below you to allow you to recoup your costs and turn a profit. A fully signed up pyramid scheme will run out of people very quickly. In New Zealand, with a population of 5 million, for a scheme where everyone recruits 10 people below them, by the seventh level of recruits there are not enough people in the country to fill all the places. And, of course, most people are wise to the folly of signing up for a pyramid scheme so the catchment space of potential recruits is pretty small - mostly people who’ve never read about the horrors of these kinds of schemes.
So, the moral of this story is to check what you’re investing in before putting any money down. Usually if a scheme looks too good to be true, it’s probably not true - if the profits are way above what you can get elsewhere, be skeptical. For a scheme like Football Index it’s best to treat your investment like gambling and, as with all gambling, don’t risk anything you’re not prepared to lose. And if the scheme is more like a pyramid or Ponzi scheme, consider that there are two possible outcomes. Either you are one of the vast majority who ends up losing the money they invest, or you end up being one of the lucky few who make money by profiting from the unsuspecting majority who have lost everything. Neither of those is a scenario I would want to find myself in.