What is a Ponzi scheme? The definition of a Ponzi scheme scam.

Have you wondered what a Ponzi scheme is? You might heard of Ponzi schemes, especially related to scams or fraud in recent financial news. Learn how a Ponzi scheme works so that you can avoid it!

Learn how a Ponzi scheme works

A Ponzi scheme is named after its most famous practitioner, Charles Ponzi. The scammer starts a Ponzi scheme by offering an investment with unbelievably good returns. For example, you will be told that you can invest your money and you will receive double the amount back in one month. Let’s say Tom gives the Ponzi scheme $100 on July 1st. Now, another fellow, John, gives the Ponzi scheme $100 on July 14. Two more fellows, Bob and Andy, give the Ponzi scheme $100 on July 31.

On August 1, the scammer pays Tom $200 using Tom’s original money and John’s $100. Tom is delighted, so he immediately puts $1000 back into the questionable investment. On August 14, the scammer pays John back $200 using John and Bob’s money. As expected, John puts $500 back into the Ponzi scheme.

We see that there are no actual profits being generated by the investment. The Ponzi scheme only works because of the time delay between investments and returns. This type of scam is not
sustainable. If Tom and John had quit while they were ahead, they would have made money. However, on August 14, the scammer takes all of the money and does not pay anyone again.

If you join a Ponzi scheme late, like Bob and Andy, you will always lose your money. Don’t take the risk with this type of fraudulent investment. Ponzi schemes are also illegal.

The largest Ponzi scheme in history may be the $50 billion scandal involving Bernard Madoff.

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