Ponzi Schemes Rania Hans

Fraud. Deception. Scam.

A Ponzi scheme is a fraudulent investment operation in which money is collected from later participants to pay returns to earlier investors. This entices investors with high rates of return and little risk. The ponzi scheme was formulated and named after Charles Ponzi in the 1920s. Ponzi was a businessman who guaranteed investors a 50% return for their investment in what he said were international postal coupons within a few months. Ponzi paid phoney "returns" to earlier investors using money from new participants Ponzi schemes need a steady inflow of new money to survive because they have little to no actual earnings. When it becomes impossible to recruit new investors, or when substantial numbers of existing investors cash out, these schemes tend to implode.

What's the difference between a Ponzi scheme and a pyramid scheme?

In Ponzi schemes, investors give money to a portfolio manager who then pays them back with money that later investors contribute. To participate in a pyramid scheme, new recruits must pay the person who recruited them in exchange for the opportunity to do so or possibly to sell a specific product. The first schemer recruits more investors to do the same and this chain carries on. Over all the main differences between the two are: Ponzi schemes: the promise of future rewards tempts victims to invest. Pyramid schemes: they provide their victims with the "opportunity" to earn money by enlisting new members

One of the most infamous cases of a Ponzi scheme is the 2008 Bernie Madoff scandal. Madoff deceived thousands of investors for tens of billions of dollars over the course of at least 17 years. So how did he do it? Madoff was a respectable figure and had a reputation for being a reliable investor which he used to his advantage. Investors would give Madoff their money to invest and Madoff would provide them with a ‘return’. However, in reality the money he would return wasn’t from investments but was simply a small proportion of their initial investment, which he would disguise as a ‘return’.

Eventually, more money was needed, therefore Madoff would move onto the next investor, growing the scam. On record, the investors had money invested in Madoff's firm and received a good return. In actuality the money was being syphoned into Madoff’s account as well as being used to pay back old investors to keep the scam afloat.

Are Ponzi schemes still prevalent today?

In recent times, there has been rising concerns regarding ponzi schemes being used in cryptocurrency. This is considering that when evaluating anything unique, new, or "cutting-edge," potential investors are frequently less cautious of an investment opportunity. In 2016 a man by the name of Trenton Shavers was arrested after his bitcoin ponzi scheme was exposed. Shavers guaranteed investors astronomically high returns on their Bitcoin investments, averaging 7% weekly. Shavers utilised the Bitcoin he received from clients to pay for personal costs and make unsuccessful attempts at day trading. There has been an increasing amount of similar crypto scams in more recent years.

How can you identify a ponzi scheme?

Look for these signs:

A pledge to provide great profits with minimal risk

A steady stream of returns irrespective of market conditions

Unregistered investments

Customers are prohibited from viewing the official papers related to their investment and the investing methods are classified as confidential or too complicated to explain.

Previous Customers had trouble withdrawing their money