Ponzi Scheme 101
This is the one that started it all. In 1903 a man by the name of Charles Ponzi discovered a way to make great fortunes. It worked by using the investments of subsequent investors, (as opposed to the profits of the company), to pay the initial investors. The initial investors would indeed make great fortunes. But, some time down the line, the final round of investors will lose all of their money. This scheme is basically not a sustainable business model. Let's take a look at a hypothetical example.
You have a fantastic opportunity to join my "high-return investment fund". You could double your money within 30 days. All you have to do is invest $1000 and get two friends to join.
Sure enough, you and your two friends see this as a great investment opportunity. When your two friends invest $1000 each, there is now $2000 in the pot. That $2000 is now used to pay you. Congratulations! You just doubled your money!
And, what about your two friends? Well, they each need to get two friends to join. Sure enough, they find four other friends who also see this as a great investment opportunity. When those four friends invest $1000 each, there is now $4000 in the pot. That $4000 is divided between your two friends. Wow! Your two friends just doubled their money!
Do you begin to see what is happening here? At each subsequent level, it takes progressively more and more investors to payoff the previous level of investors. At some point, it would require more than the number of people on this planet!
The basic thing to watch out for is whether the company is selling any kind of products or services. Ponzi scheme in its most purest form has neither. So, be careful out there. Ponzi schemes can be very sophisticated.
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Actually you didn't mention the administrator's cut. Only one of your friends "investments" is needed to pay you off, the other $1000 goes to the schemer.
Yes, there are many variants of Ponzi Schemes, including the one that you described. I was trying to show why the scheme must eventually fail.
Actually,
Charles Ponzi ran his big scam in the summer of 1920 and he was smart enough to give the illusion of legitimacy. He didn't just ask for money and recruits. He was promising 50% return on investment in 45 days but he claimed to be returning only a portion of the 400% profit he was making by trading postal coupons. So the "investors" believed they were getting into a legitimate business opportunity. Well after he started paying off the first set of recruits the next wave started flocking in. He eventually brought in 9.5 million before it collapse. 9.5 million in 1920 would be quite huge in today's dollars.
Every ponzi scheme or pyramid scheme out there worth mentioning using this hidden product to mask what is truly going on. Without it too many red flags are raised.
Today this is usually pulled off through what has been convienently re-named as multi-level marketing. Often they do provide a legitimate service. Its just over priced, always over priced and usually greatly so. Ones that are barely over-priced can stand on their own two feet if everyone in them is willing to pay slightly inflated rates for the products they are getting. These can continue forever. Ones that are vastly over-priced will collapse on themselves in short order.
But for none of these are there great riches to be found unless you happen to be one of the people at the very top of the scheme. Trust me, by the time you hear about it, you are not at the top, you are the poor shmuck coming in at the bottom to help hold up the scheme for just a little longer.
The really sad thing is how people who get sucked into these have no idea what they have gotten themselves into. I did a big post on a ponzi scheme at http://www.wealthyblogger.com/uncategorized/heyyyyy-its-the-ponz and the comments for the post are full of posts trying to defend an obvious ponzi scheme called Treasure Traders International based on the fact that there was a trivial product attached.
Hmmm... is this basically a pyramid scheme similar to that which made the Albanian economy crumble in the late 90s? I've seen a few people get sucked into these and most get ripped off. Steer clear!
