Ponzi Scheme

A Ponzi scheme is a scam that looks to lure investors, ultimately paying profits to earlier investors with funds from more later investors.

This form of fraud tricks victims into believing that products are instead generated from product sales or other means.

In actuality, most investors are completely oblivious to the actual origin of incoming funds.

One of the central attributes of a Ponzi scheme is the necessity of its ongoing nature, which is dependent on a steady flow of new contributions and funds.

This can unravel quickly should investors request or demand repayment or lose faith in whatever assets they are supposed to own.

While earlier episodes of this scam were carried out historically, the name Ponzi scheme is associated with Charles Ponzi in the 1920s.

His original scam was based on the legitimate arbitrage of international reply coupons for postage stamps.

This eventually gave way to diverting new investors' money to make payments to earlier investors and to himself.

How to Identify Ponzi Schemes?

Like any scam, Ponzi schemes follow a few basic trends that investors should be mindful of.

A healthy amount of skepticism in regards to investing should always be present, which should help identify ways that scams look to market themselves.

For example, Ponzi schemes almost always require an initial investment and promise above average returns.

This also includes purposely vague or arbitrary terminology to help confuse more novice investors.

This fraud is riddled with mentions of "high-yield investment programs", "offshore investment", or “guaranteed returns”.

Any sort of investment opportunity should always be analyzed and researched. In the modern era, many tools are available to identify scams or fraudulent operations.

Regulators in most jurisdictions are constantly policing against these forms of market abuse and it is important to check these registers before actually investing in dubious opportunities.