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Is Fundrise a Pyramid Scheme?

Fundrise has become one of the most well-known and popular places to invest in Real Estate.  However, some people have alleged that Fundrise may be a Pyramid Scheme. I have gone ahead and conducted my own research on this question and here’s what I found:

Fundrise is not a Pyramid Scheme. The fact that your money is locked in for a certain number of days does not make it a scam. It is simply due to the nature and regulation of real estate. Fundrise is registered with the SEC and its holdings can be thereby verified.

In this article, we will dive a bit deeper into what a Pyramid Scheme exactly is and how you can make sure that a Fundrise is legit. We will also look at the inherent risks of investing in Fundrise and whether your entire capital is at risk.

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What is a pyramid scheme?

First of all, let’s consider what a Pyramid Scheme actually is. A Pyramid Scheme presupposes that there is a certain number of people that come in each round to increase the capital supply of the scheme. This way the people that get in first reap the rewards of the people that come in later with the first person to start the scheme at the top gaining the most.

The illustration above depicts this point quite clearly. As the number of participants has to increase as the levels progress the required number of participants to sustain the entire scheme eventually reaches and even exceeds the world population.

With this definition of a Pyramid Scheme let’s see if Fundrise actually holds up to this definition.

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Why do people think Fundrise is a pyramid scheme?

People have alleged that Fundrise is a Pyramid Scheme mostly because they are not able to withdraw their money anytime they like. However, such a lock-up period is common for liquid investments such as real estate.

Especially on Reddit, there has been some debate about the legitimacy of Fundrise:

  • Does Fundrise actually hold the real estate it claims to hold?
  • Does Fundrise use too much leverage to buy over-leveraged assets?
  • What would happen to Fundrise if all investors decided to pull out at once and create a bank run?

The overwhelming majority of Reddit users agree that such claims simply cannot be verified about Fundrise.

Another reason why some users have wielded accusations against Fundrise for being a scam is that they have suffered losses for withdrawing their funds early. However also the fact that a penalty will be imposed on the early withdrawal of funds – i.e. less than one year – is clearly stated in the terms and conditions. 

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How to make sure Fundrise is not a pyramid scheme

In order to make sure that fun dries is not a Pyramid Scheme ask yourself the following questions:

  • Does Fundrise require the acquisition of new users to be sustainable?
  • Do users that get in early inherently gain more than users that get in later?
  • Is there a theoretical limit to how big Fundrise could grow?

The answer to all of these questions is a resounding no. even if Fundrise did not acquire any new users in the foreseeable future or for that matter ever it would still be a sustainable business.

Furthermore, early adopters or early users do not inherently get a better return than users who joined later full stop instead the return depends mostly on market conditions full stop of course the earlier you get in the more time your capital has to compound which it does not fit the definition of a Pyramid Scheme.

While it is unlikely that Fundrise will grow to comprise the entire world population it is not theoretically impossible. even at such a large point Fundrise would be fully sustainable and would not require more people to join for the system to function. 

Another more formal way to make sure that Fundrise is legit is to check the SEC filing and related documentation. while this way still requires you to trust a third party for verification you can be almost certain that a regulatory authority would not have omitted a Pyramid Scheme to become licensed.

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Can you lose all your money in Fundrise?

In theory with every investment, your entire capital is at risk. if an investment would not be at risk at all there would be no returns. this also means that you could theoretically lose all of your money in Fundrise.

With that said the conditions that would have to come true for you to lose all of your capital in Fundrise would have to be the following: the collapse of the entire United States real estate market and all of its related assets.

Such conditions could only come true in cases of a total collapse of human civilization to an immense natural disaster or a possibly self-destructive event. It is safe to say that in such a scenario you likely would have more urgent problems than thinking about your fun price capital.

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What are the risks of investing in Fundrise?

However, I do not want to deny that there are risks involved with investing in a real estate platform such as Fundrise. real estate is an inherently evil liquid acid which means that your money will be locked up for a certain period of time.

An investment in real estate can therefore never serve as an emergency fund or can be withdrawn in case of a personal crisis. Another risk is posed by the volatility of the real estate market which has seen heavy downturns such as in 2008 when the entire market collapsed and a lot of real estate has lost its value.

While there is generally also a country risk in investing that our profile for the United States is very low on the world stage. All in all, Fundrise has made private and commercial real estate much more available to the average retail investor and has provided an opportunity that has before only been available to a very wealthy few. 


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