What is Ponzi Scheme?
350 reads · Last updated: December 5, 2024
A Ponzi scheme is a fraudulent investing scam promising high rates of return with little risk to investors. A Ponzi scheme is a fraudulent investing scam which generates returns for earlier investors with money taken from later investors. This is similar to a pyramid scheme in that both are based on using new investors' funds to pay the earlier backers.Both Ponzi schemes and pyramid schemes eventually bottom out when the flood of new investors dries up and there isn't enough money to go around. At that point, the schemes unravel.
Definition
A Ponzi scheme is a fraudulent investment scam promising high returns with little risk to investors. It generates returns for earlier investors by acquiring new investors' funds. This scheme is similar to a pyramid scheme as both rely on using new investors' money to pay earlier backers.
Origin
The Ponzi scheme is named after Charles Ponzi, who defrauded many investors in the early 20th century using this method. Ponzi promised high returns in a short period, using new investors' funds to pay returns to old investors until the scheme collapsed in 1920.
Categories and Features
Ponzi schemes typically lack actual investments or products and rely entirely on continuously attracting new investors. Features include promises of high returns, low risk, lack of transparency, and complex investment strategies. Without a real source of profit, the scheme collapses once new investor inflow decreases.
Case Studies
A famous Ponzi scheme case is Bernard Madoff's investment firm, which operated a decades-long Ponzi scheme involving up to $65 billion before his arrest in 2008. Another case is China's Ezubao, a fraudulent P2P lending platform that attracted investors and eventually defrauded hundreds of thousands of people.
Common Issues
Investors are often lured by promises of high returns, overlooking the risks. Common misconceptions include believing high returns are sustainable or that the company has a legitimate profit model. Investors should be wary of overly complex investment strategies and companies lacking transparency.
