What is the Ponzi scheme, and how do we know it? What is the difference between a Ponzi and a pyramid scheme?
If somewhere you were promised astronomical and guaranteed profits (for example, more than 10% per month) for your money, you are probably on the side of a Ponzi trick that wants to defraud you and get the capital you have been trying for years. In this article, you will get acquainted with Ponzi and pyramid schemes and how to detect them.
What is the Ponzi scheme?
A Ponzi scheme is a scam in which a Ponzi designer, promises uninformed people that if they give him their money, he will work with that money and give investors a guaranteed return.
Initially, (to gain more trust) new people are paid interest on old investors to attract more investors to the system. Eventually, the plan is thwarted by saturation and the lack of a new investor, and the scammer usually runs away with a lot of money.
To better understand the Ponzi scheme, consider the following example (names and numbers are hypothetical):
Suppose Robert is a scammer trying to do a Ponzi trick. He sets up a fake company or website and promises people that if each of them pays $ 10,000, he will invest the money in the New York Stock Exchange, digital currencies, or anywhere else, and earn $ 2,000 a month. Robert pays guaranteed interest to investors (20%).
But in reality, there is no investment and only play with money.
After a while of publicity and initial investment, Robert has now raised hundreds of thousands of dollars.
For the project to continue and attract more money, Robert pays dividends to new investors from the money of new investors. This allows old investors who have initially made a profit to introduce the scheme to their friends and acquaintances, and newer investors are attracted.
After good money is raised or when no new investor is found, Robert runs away with the money, and the plan falls apart.
The Internet has led to the proliferation of Ponzi designs because it is easier to advertise and receive money, and the designer can remain anonymous.
Where does the name Ponzi plan come from?
Charles Ponzi (one of the most famous scammers in history) is the inventor of the Ponzi scheme. By selling discount coupons at the post office, he promised investors a 50 percent profit in 45 days or a 100 percent profit in 90 days.
Ponzi’s method was to use the capital of former investors as well as new investors to pay interest on the first ones. Charles Ponzi could defraud more than $ 20 million with his innovative design in the 1920s in the United States.
How long does the Ponzi scheme take?
As mentioned above, the Ponzi plan will continue as long as there are enough new investors or the designer is satisfied with the amount of money earned. The designer no longer makes a profit after a large amount of money has been raised, or other new investors have not entered the field as needed. As a rule, a Ponzi scheme usually does not last more than two years.
How does the Ponzi scheme work?
In general, all Ponzi designs follow the same cycle, but the way they work can be a little different. The core of all Ponzi designs is the same, but the appearance and type of claims are different.
The primary cycle in all Ponzi designs is as follows:
1- Deceptive advertisements
Initially, with false advertising (usually on the Internet or social media), a few people are attracted to the system and invest a small amount. Some Ponzi plans also incorporate marketing methods that increase profits if a new member logs in.
2- Deposit initial profits and gain trust
Profits are deposited regularly to gain more confidence for more money and new investors. These profits are paid either with the money of new investors or with the initial capital of the designer.
3- Receiving a large amount of capital
Once people trust the system, a large amount of money enters the system. Older investors also invest more money and even invite close friends and acquaintances to the project. At this stage, blind prejudices cause some investors to even take out heavy loans or even sell their houses or cars.
4- The collapse of the plan
Items 1 to 3 are repeated several times until there is no new investor, or a large amount of money has been raised. After that, the designer picks up the capitals and disappears.
How to detect a Ponzi scheme?
Although Ponzi scams come in many forms, all of them have several main features, including:
· Astronomical and guaranteed benefits
The promise of astronomical and guaranteed profits is one of the main features of a Ponzi scheme. Wherever you see this promise, doubt that it is Ponzi. Profit astronomical means that if you are going to work with your money, the profit is still lower than the Ponzi scheme. For example, fish with more than ten percent guaranteed profit is very suspicious.
Think about how someone can guarantee such a profit without any risk?
· The anonymity of the designer
There is not much information about the team or manager in a Ponzi scheme, and even if there is, pseudonyms or fake names are often used. A Ponzi designer does not want to be identified.
· Lack of transparency in activities
A Ponzi scheme does not fully explain how it earns its astronomical profits and how it guarantees it. For example, some schemes say they invest users’ money in capital markets or cryptocurrency mining, but do not say how they do it or how they are safe from the risk of price fluctuations, mining difficulties, and so on.
· No valid contact information
Ponzi plans usually do not disclose valid addresses and telephone numbers or resort to fake addresses and multi-day offices. Anonymity is one of the main features of a Ponzi scheme.
· Strange ways to get money
The designer tries to collect the money through illegal portals or digital currencies so that it is difficult for the police to track it down.
· Lack of legal permits
Ponzi projects cannot obtain legal permits. Of course, sometimes a plan is so professional that it also deceives the legislature
Differences between a pyramid and Ponzi design
The Ponzi scheme has many similarities to the pyramid scheme, which often leads some users to equate the two. But the fact is that the pyramid scheme is not the same as the Ponzi scheme, and some features distinguish them.
What is a pyramid scheme?
The pyramid scheme is a model that promises individuals that they will receive astronomical profits if a new member is brought into the system and invested. A pyramid scheme can include a set of goods or services that a new member must purchase for the benefit to accrue to a senior.
To better understand the pyramid scheme, consider the following example (names and numbers are hypothetical):
A pyramid scammer has some worthless soil. He advertises a lot and falsely claims that his soil is different from other soils, and if the soil is poured into the plant pot, it will grow faster. Therefore, the price of soil is higher compared to other soils in the market. He offers an ignorant person named Jack to buy some land for his house for $ 500. But this is not the whole story.
The scammer tells Jack he can get rich with his pyramid scheme. In this way, if he invites his friends and they buy the soil, he will make a profit in a pyramid and up to several levels. So, the scammer can quickly sell his regular product at several times the market price, and if there is no sale, he does not have to pay interest. He uses Jack as a tool to promote his worthless product. Advertising whose return is guaranteed.
There are two scenarios for the future of this pyramid scheme:
1- Until the new members arrive, the plan continues, and the scammer pays the profit because he can sell his worthless product at a high price. After a while, when new members do not enter, the higher members will not receive any interest, and the plan will be destroyed automatically.
2. After a while, the scammer cannot even give the product and run away with the large sums of money he has collected.
Similarities between Ponzi and Pyramid
· Both empty the pockets of victims by promising astronomical profits.
· Both need to attract new members to survive.
Differences between Ponzi and Pyramid design
· Ponzi’s plan claims to invest money in the market, but we are on the side of a pyramid scheme with a range of products or services.
· The Ponzi scheme may not be networked, but the pyramid scheme is networked, in which older members invite newer members.
· The Ponzi scheme is a complete scam, and the law deals with it, but the pyramid scheme, although fundamentally problematic, can also be legal.
Conclusion
The Ponzi scheme is a scam method that attracts victims of capital by promising guaranteed and astronomical profits.
Fraudsters pay investors a guaranteed return in the first few months to gain more trust. The guarantee is done using the money of new investors. After a while, much money was attracted, and no new investor entered the system, scammers no longer pay and run away.
It is not difficult to distinguish Ponzi designs at all. The most important feature of these schemes is the guaranteed astronomical benefits and anonymity. Due to the nature of digital currencies in the privacy of transactions and the absence of sanctions. These days we are witnessing an increase in the activity of Ponzi projects in the cryptocurrency field until the legislators, the investors have the main responsible for their assets themselves.
