Ponzi scheme, Ponzi system or Ponzi game is a fraud method that aims to involve investors in the system by pretending that there is a production with high profit, and the first investor is paid with the money of the later participants in the system.
What is a Ponzi Chart?
A Ponzi scheme is a scam investment scam that promises investors high rates of return with little risk. A Ponzi scheme is a fraudulent investment scam that provides returns to earlier investors with money received from later investors. This is similar to a pyramid scheme in that both rely on using funds from new investors to pay out previous 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 stick around. At this point, the plans unravel.
Understanding Ponzi Schemes
A ponzi scheme is an investment scam in which clients are promised a large profit with little or no risk. Companies involved in a Ponzi scheme focus all their energies on attracting new customers to invest.
This new income is used to pay the original investors their returns, which are marked as profits from a legitimate transaction. Ponzi schemes rely on a constant stream of new investments to continue providing returns for old investors. When this flow is finished, the schema dissipates.
The Origins of the Ponzi Scheme
The term “Ponzi Scheme” was coined in 1920 after a swindler named Charles Ponzi. However, the first recorded instances of this type of investment fraud can be traced back to the mid to late 1800s and were led by Adele Spitzeder in Germany. In fact, the methods of what is known as the Ponzi Scheme were described by Charles Dickens in two separate novels written by Martin Chuzzlewit, published in 1844, and Little Dorrit, published in 1857.
Charles Ponzi’s original plan in 1919 focused on the US Postal Service. At that time, the postal service had developed international response vouchers that allowed the sender to pre-buy the postage and include it in their correspondence. The buyer takes the coupon to a local post office and exchanges it for the priority air postage stamps required to send a response.
Ponzi schemes rely on a constant influx of new investments to continue providing returns for old investors.
This type of exchange is known as arbitrage, which is not an illegal practice. However, Ponzi became greedy and expanded his efforts.
promised 50% return in 45 days and 100% return in 90 days under the title of Stock Exchange Company. Investors were immediately attracted due to its success in the postage stamp order. Instead of actually investing the money, Ponzi redistributed it and told investors they were making a profit. The plan lasted until August 1920, when the Boston Post began investigating the Stock Exchange Company. As a result of the newspaper’s investigation, Ponzi was arrested by federal authorities on August 12, 1920, and charged with several mail fraud charges.
Ponzi scheme Red Flags
The concept of the Ponzi scheme did not end in 1920. As technology changed, so did the Ponzi scheme. In 2008, Bernard Madoff was convicted of running a Ponzi scheme that falsified trade reports to show that a client was making a profit on non-existent investments. Madoff died in prison on April 14, 2021.
Most of them have similar features, regardless of the technology used in the Ponzi scheme:
1. Guaranteed high returns with little risk
2. Consistent regardless of market conditions a stream of returns
3. Investments not registered with the Securities and Exchange Commission (SEC)
4. Investment strategies defined as confidential or too complex to explain
5. Clients’ investments
6. Customers have difficulty withdrawing their money
