Part 21: Ponzi Scheme
A Ponzi scheme is a type of investment fraud that entices victims by promising them higher-than-normal returns on the pretext that the money will be invested in high-yielding, low-risk ventures. However, the fraudsters don't invest the money but pay earlier investors with money collected from new investors. When there are not enough new investors, the most recent investors lose their money.
Here are a few example sentences.
(1) "Police have confirmed that none of the money went into a mortgage scheme, so it was an elaborate Ponzi Scheme."
(2) "This booklet explains how people are lured into ponzi schemes."
(3) "Bitconnect is a ponzi scheme trying to piggyback on the crypto craze."
(4) "What would you do if all of your retirement money was lost in a ponzi scheme?"
Here is how it works.
I have 200K.
I tell you to invest 50K today and you will receive 100K in couple days. You give me 50K, I give you 100K, and you think to yourself, "Wow, I just doubled my money!"
You inform your friend about it, and the next day you both come to me and give me 50K each.
I take 50K from each of you, so I have 250K.
You return in a few days, and I give each of you 100K, leaving me with 50K. You and your friend just made the easiest money in your entire life. You are so happy that you tell all your friends about it.
Rumors spread fast, so next day 10 people come and give me 100K each. Now I have 1.05M and I tell them - okay, come back in few days.
Next day, another 20 people bring me 100K each, a total of 2M.
By the time when the first 10 people will come to get their 2M, I'll be having 3.05M.
I'll keep repeating this cycle until I decide it's time to "grab my money" and disappear. By that time, it might be in the hundreds of millions.
The word Ponzi Scheme comes from the second name of Charles Ponzi
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| Charles Ponzi |
Ponzi, dubbed the smoothest con artist of the twentieth century, was not the first to utilize this method to defraud people. Before him, it was called Robbing Peter to Pay Paul, but he was the first to pull it on such a huge scale that it led to the collapse of several Boston Banks.
The term Ponzi Scheme was first used in court records during Ponzi's trial, but it wasn't acknowledged as an English phrase until 1958 when it was placed in the Oxford English Dictionary.
Even today, millions of dollars are lost each year to Ponzi schemes.
Follow this link to read the story of Charles Ponzi and the Ponzi scheme. It will take you about 10 minutes.
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