The Ponzi scheme uses the money of the latecomer to pay the first. Participants will be attracted by the promised large sum of money, but in fact the money they invest is only to pay the first, disguised as “profits”.
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What is Ponzi scheme?
The Ponzi scheme is an investment fraud, which promises a high rate of return with little risk to investors. The Ponzi scheme generates returns for first-come, first-served investors by making money from latecomers. Companies participating in the Ponzi scheme will focus all of their efforts on attracting new customers to invest.
This is similar to a pyramid scheme in that both are based on using late investors’ money to pay those who come first. Both models eventually bottom out when the later investor’s cash flow is exhausted and there is not enough money to continue.
This new income is used to pay the initial investors their returns, highlighted as a return from a legitimate trade. Ponzi schemes rely on a new influx of investment to continue to yield returns to old investors. When the money is exhausted, the pattern collapses.
The origin of the Ponzi scheme
The Ponzi scheme is named after the fraudster Charles Ponzi, who staged the first case in 1919. The postal service, at the time, developed international response ballots that allowed the sender to send. postage before paying and putting it on their correspondence. The recipient will take the voucher to a local post office and exchange it for the postage stamp by priority air to return a reply.
The fluctuation in postage prices means that stamps generally get more expensive between one country and another. Ponzi hired agents to buy cheap international coupons in other countries and send them to him. After that, he will exchange coupons for more expensive stamps than the original one. The stamps were then sold for a profit.
This type of exchange is considered a speculative arbitrage, not an illegal conduct. But Ponzi became greedy and expanded his motives.
Under the shadow of the company he runs – the Stock Exchange, he promises to pay back 50% in 45 days or 100% in 90 days. Due to the success in the postage stamp model, investors were immediately attracted. Instead of actually investing the money, Ponzi just redistributed and told investors they had made a profit.
This pattern lasted until August 1920, when The Boston Post began investigating the Ponzi Securities Trading Company. As a result of the newspaper’s investigation, Ponzi was arrested by the federal government on August 12, 1920 and charged with several charges of mail fraud.
Alarm pattern Ponzi
The year 1920 still did not completely put an end to the Ponzi scheme. As technology changes, so does the Ponzi scheme. In 2008, Bernard Madoff was convicted of running a Ponzi scheme that falsified transaction reports to show a client they were making a return on investments that did not exist.
Regardless of the technology used, the Ponzi scheme almost all shares the same characteristics:
– A commitment to ensure high returns with less risk
– Stable profit flow regardless of market conditions
The investment strategy is secret or described as too complex to explain
– Customers are not allowed to see official documents for their investments
– Customers have difficulty withdrawing their money