What Is a Ponzi Scheme and How Does It Work? – Learn to Avoid Them!
If you have seen some “Make Money Online” -scams, you have probably heard a term “Ponzi Scheme”. But What Is a Ponzi Scheme and How Does It Work? Today I am going to explain you in a simple manner and give a few tips how you will never fall in them.
What Is a Ponzi Scheme?
Ponzi scheme is a fraudulent investment operation where the founder pays very high returns for initial investors. The money comes from new investors and they are paying for those who joined the program earlier. When new investors stop coming in, the system collapses.
Normally when you invest in a stock market, you can expect on average 6-8% annual interest. But Ponzi schemes promise you much higher returns, for example, 200-300% ROI. High returns entice new investors to join. And when the first investors start seeing their income, they recommend the program for others and the system grows.
Many times a Ponzi scheme is hidden under a business that looks legitimate but really is not. For example, Click Ad Xpress, Fort Ad Pays or Lotto Magic promises to give you a product but actually all returns depend on new investors.
Here simple video explains very well in 83 seconds how a Ponzi scheme works
Charles Ponzi, the Founder of the First Famous Ponzi Scheme
Ponzi schemes started in the 1920s by an Italian guy called Charles Ponzi. He said that by buying postal reply coupons and redeeming them in the United States they would make a huge profit. He promised clients a 50% profit within 45 days, or 100% profit within 90 days.
When new people joined, he was able to pay high returns for the first investors. Investors had already invested more than 20 million before it collapsed after a year from starting the “business”. 20 million in 1920 equal to more than 250 million in 2017 because of the inflation. It helps you to understand that Charles Ponzi’s scheme was a big thing back then.
But after all, Charles got arrested by running this system and cheating other people. That’s what happens to most Ponzi scheme founders after all. Many times they take the money the investors have give and try to disappear. But often police finds them and puts them into a jail. Now, for example, Bernard Madoff is sitting in jail for the rest of his life (or until 2139) because of his Ponzi scam back in 2008.
It gives us a lesson that doesn’t ever create a Ponzi scheme. For me, it’s even hard to understand how some people can become so immoral that they start cheating people with Ponzi schemes. That’s why the Book of books says:
For the love of money is a root of all kinds of evil. Some people, eager for money, have wandered from the faith and pierced themselves with many griefs.
Money itself can be a neutral thing but if you love it more than anything else, your values are not very good, in my opinion. That’s why I recommend making money online by providing value for other people.
How to Stay Out of Ponzi Schemes?
Nobody wants to get scammed. That’s why I have written you 5 principles how to avoid scams online. If you follow those rules you will never get scammed. But let’s concentrate today on Ponzi schemes. How to avoid them.
1.If somebody promises very high returns on investments, be careful. I am not saying that high returns on investments are not possible. I, for example, made a 1500€ profit with 500€ investment with bitcoins which is not a Ponzi scheme. Some of my friends have made even tens of thousands of euros in a short period of time with bitcoins. High returns are possible but you must be are careful when somebody is promising something like that.
2.Investigate what is the business model/system all about. Is there a real business or are they just promising something that isn’t real? The business where you are investing must provide some kind of value.
3.Read reviews. Nowadays we don’t need to trust only what our friend says because we can check the information also on the Internet. Google the system and write, “Is xxxxxx a Scam?”. Then check 5-10 ten articles to find out the answer. But remember that people may be promoting Ponzi schemes so you need to be careful with some reviews. That’s why the free trial of the system gives a better picture.
I would like to hear from you also. How could you avoid Ponzi schemes? Leave a comment below.
Conclusion – What Is a Ponzi Scheme and How Does It Work
Let’s take a short summary what are the characteristics of a Ponzi scheme:
1.Promises ultimately high return on investments
2.Not a real business model = Doesn’t provide any real value
3.New investors high returns make possible
4.System collapses when nobody joins the system again
I am glad that I have never fallen into a Ponzi scheme. The first real “make money online” -program that I found was Wealthy Affiliate and it turned out to be a legitimate system. They teach how anybody can build a real online business even without former experience. I saw there people who were making more than $10,000/month online and living like a king in China.
My first thought was that it must be a scam. But when I got to know these people personally and saw more and more examples, I realized that Wealthy Affiliate training works. Nowadays I am making money online every month and I planning to become a full-time online entrepreneur soon. Then I will also move to Asia like my mentor in Wealthy Affiliate (nowadays he lives again in U.S). If you are interested in making money online, I recommend taking a closer look at WA.
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Have you ever seen Ponzi schemes online?