What it is
A Ponzi scheme is a kind of investment scam that pays earlier investors with the money of newer investors. The system creates illusions of legitimacy and huge profits but is reliant on a steady stream of new investments.
It becomes unsustainable and collapses when a lot of investors cash out and there isn’t enough new money coming in from existing or new investors to cover payments.
The scam is named after Charles Ponzi, a person who got rich from peddling a fraudulent investing opportunity in the US in 1920.
What it means for you
You must avoid this scheme at all costs when you’re considering investment options. Be aware of the common red flags like guaranteed high profits with no risks, incentives when you refer new recruits, and lack of authority to offer investments.
Ponzi schemes often lack transparency on where the investors’ pooled money goes. This is because there aren’t any legitimate underlying assets that could actually grow participants’ money to meet the promised profits. Some or most of it is pocketed by the scammer.
These schemes continue to gain the trust of unsuspecting investors since they manage to appear like a legitimate company that issues attractive returns for a little while.
That’s why it’s important to be aware of warning signs and to consult legitimate experts or even authorities if you’re unsure about an investment offer.
