What is a Ponzi Scheme ?

Today we’re going to Discuss about What is Ponzi Scheme ? 

What is a Ponzi Scheme ?
Ponzi schemes are named after Charles Ponzi, an Italian fraudster who immigrated to North America and became famous for his fraudulent money-making scheme. In the early 1920s, Ponzi managed to defraud hundreds of victims and his scheme ran for more than a year. Basically, a Ponzi scheme is a fraudulent investment scam that works by paying off old investors with money raised from new investors. The problem with such a scheme is that investors on the backend will not be paid at all.

A working Ponzi scheme would look something like this:

1. The promoter of an investment opportunity takes $1000 from the investor. It promises to repay the initial amount with 10% interest at the end of a predetermined period (eg 90 days).

2. The promoter is able to secure two additional investors before the completion of the 90 day period. He will then pay the first investor $1100 out of the $2000 collected from investors two and three. It will probably encourage the first investor to reinvest the $1000.

3. By taking money from new investors, the fraudster is able to pay the promised returns to the initial investors, persuade them to invest again and invite more people.

4. As the system grows, the promoter needs to find more new investors to join the scheme. Otherwise, he will not be able to pay the promised compensation.

5. Eventually, the scheme becomes unsustainable and the promoter gets caught with the money he has or disappears.