What is a Ponzi scheme? What are its fraudulent methods?

When people hear the term “Ponzi scheme” in the financial industry, many will feel indignation. This method exploits human desires, painting a dream of wealth while siphoning off money— the hard-earned result of sweat and tears—from “investors.” Many financial scams are derived or transformed from the basic concept of a “Ponzi scheme,” yet even those who have heard the term may not be well acquainted with its origins or tactics. This time, let's explain the “Ponzi scheme,” introduce some representative cases, and consider ways to avoid being deceived.

Definition and History of Ponzi Scheme

The term “Ponzi scheme” derives from the Italian con artist Charles Ponzi. This scheme attracts ordinary people, lacking the ability to discern the truth while dreaming of becoming wealthy overnight, by introducing investment opportunities that promise low risk and abnormally high returns. In reality, it pays existing dividends not from investment earnings, but from the solicitation of new investors or further contributions from existing participants, leading to its collapse if the influx of new funds stops, allowing the con artist to abscond with most or all of the victims' money.

Examples of Ponzi Schemes

With the rapid development of the economy and the Internet, various forms of “Ponzi schemes” are emerging one after another.

Madoff case

The Madoff case is the most famous and typical example of a “Ponzi scheme” that lasted the longest. This fraud continued for over 20 years, but ultimately came to light during the global financial crisis of 2008, when withdrawal requests of about $7 billion due to market downturns were made.

PlusToken Crypto Scam

The PlusToken wallet is referred to as the third largest “Ponzi scheme” in history on the internet. According to a report by the cryptocurrency analysis team Chainalysis, a group of scammers impersonating PlusToken has defrauded approximately $2 billion worth of cryptocurrency investments outside of China, of which $185 million has already been sold.

How to Avoid Ponzi Schemes

1. Be skeptical of stories that promise low risk and high returns.
2. There is no such thing as a completely risk-free investment.
3. Have a certain understanding of investment products and strategies.
4. Fully understand the status of the project.
5. Utilize the internet to research relevant information.
6. Be aware of the difficulties in fund recovery.
7. Identify the investment model.
8. Consult an expert.
9. Understand the background of the project.
10. Understand that “there's no such thing as a free lunch.”

Summary

The “Ponzi scheme” has been packaged in various forms by speculators since its inception, but its essence remains unchanged. There is a commonality in claiming low risk and high returns, while digging new holes to fill the previous ones. Fraudsters emphasize investment risk factors and attract investors with little or no basic financial knowledge with promises of high investment returns. It is important to always keep in mind the iron rule of investing that “risk and return are proportional” and to maintain a sense of vigilance.