Scam Watch

Named after Carl Ponzi, who is one of the first people to become famous for the scam, Ponzi schemes are actually very old (the first publicized case was in 1920) but have seen resurgence with the advent of the Internet. It is also called a Bubble Scam, Ponzi schemes work by using money gained from subsequent investors to pay extremely high profits to new investors. There is no actual business process or net revenue involved and the entire system works by milking newer recruits.

While it’s arguable that Carl Ponzi didn’t invent the scheme and was not the first to use it, the scheme was still named after him because his operation in 1920 Boston caught national attention as he collected almost $9.8 million dollars from ten thousand and five hundred fifty people including a third of the Police Force and paid out around $7.8 million dollars in as short as 8 months, offering as much as 50 percent profit every 45 days.

The short timeframe between payouts and the abnormally high yield gained massive attention from prospective investors at that time, and the fact that actual payouts have happened meant that there would always be people who will provide proof and documentation for skeptics. Unfortunately, it didn’t last long.

The reason why Ponzi schemes are called Bubble Scams is that they tend to increase in size rapidly and exponentially until, like the namesake, they burst and leave the investors with nothing. The reason for a Ponzi scheme’s lack of sustainability is the fact that it doesn’t rely on any source of income other than new recruits. The lifespan is severely limited, with the revolving funds rapidly dwindling as newer recruits become fewer.

Another thing that earns its reputation as a scam is that perpetrators usually hide the entire system under the guise of an actual business with real products or services being offered, to make it look stable and legitimate. Most of them rely on confusing mumbo jumbo and complicated documentation to trick investors, who may not understand how things work but are eager to invest after seeing the money they will get.

Even though the ponzi scheme is commonly mistaken as a pyramid scheme, there is a difference between the two. Ponzi schemes usually promote a real investment opportunity in which an investor may contribute and let his money earn passively. Pyramid schemes, on the other hand, would require active participants who will recruit even more participants until they reach a specific number. The key difference is that Pyramid schemes need active participation and promotion from the members while a Ponzi scheme can thrive even with passive investors. Its lack of need for active work is actually one of the main selling points of a ponzi scheme.

Ponzi schemes on the Internet usually come in the form of affiliate programs, or subscription based Get Paid To systems wherein actual money gained from legitimate advertisers have failed to recoup the company’s expenses and have set the owners on the path to bankruptcy, they then implement a subscription or usage fee for members which they use as payout for their employees.