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Ponzi Schemes

Updated Dec 10, 2020
Article Rated: 7.63
3.8 star rating (57 votes)
The Ponzi scheme appeared in the early 1920s, although one cannot be completely sure that such schemes did not exist before. It's just that the scope of this pyramid turned out to be so huge that the scheme went down in history and became a brand. It is noteworthy that about 100 years have passed since that time, and these schemes still are popular and run smoothly.

In investing, these schemes are also widely represented. They are basically a form of fraud that attracts investors and pays returns to early investors of funds from more recent investors. The scheme makes people believe that profits come from the sale of products or other funds, and they are unaware that other investors are the source of the funds.

A Ponzi scheme can maintain the illusion of a sustainable business as long as new investors bring in new funds and until most investors demand full repayment and still believe in the non-existent assets they supposedly own.

These schemes are relatively easy to detect. For the naming, they use vague words like “hedge futures trading”, or “offshore investments” to describe their income strategy.
Some of the Ponzi schemes are hiding under the terms of High Yield Investment Programs. To distinguish a real program from a fraud you need to carefully monitor the reviews and relevant websites. They mask really well, so if you have even a small amount of doubts it is better to avoid a program.

Typically, the Ponzi schemes require an initial investment and promise highly above average returns. The operator often takes advantage of the investor's lack of knowledge or competence, or sometimes claims to be using his own secret investment strategy to avoid providing information about the scheme.

Initially, the scheme owners pay high returns to attract investors and to encourage current investors to put in more money.

When other people start investing, a cascading effect begins. Ponzi pays the initial investors the “return” based on the new entrants' investment, not the actual return. Often the high yield gotten so quickly prompts investors to keep their money in the scheme, so that the Ponzi owners do not actually have to pay the investors very much.

They simply send reports showing how much the program has earned, which supports the misconception that this scheme is a high return investment. Investors under the Ponzi scheme may even find it difficult to get their money out of the investment.

The runners try to keep withdrawals to a minimum by offering investors new plans where money cannot be withdrawn for a specified period of time in exchange for higher returns. A Ponzi scheme operator sees new cash flows as investors cannot transfer money. If several investors do want to withdraw their money in accordance with the permitted conditions, their requests are usually processed immediately, giving all other investors the illusion that the fund is solvent and financially sound.

It is not a surprise that even experienced investors sometimes fall into a Ponzi trap. If you are interested in the High Yield Investment Programs, the risk significantly increases.

Here is the list of the red flags that you need to look out for very attentively. Even one of the flags can serve as a signal to withdraw the money from the program.

Red Flags Identifying A Ponzi

Warning signs include:
  • A promise of high return on investment with little or no risk. Each investment carries a certain degree of risk, and investments that bring higher returns are usually more risky. Any “guaranteed” investment opportunity is often considered suspicious.

  • Unregistered investments. Ponzi schemes typically include investments that have not been legally registered. Registration is important because it gives investors access to key information about the management, products, services, and finances of the company.

  • Unlicensed vendors. Laws in a lot of countries require investment professionals and their firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms, with a few exceptions. Generally, giving your money to an unregistered firm even sounds shady - that is a major red flag.

  • Overly stable recoil. The value of investments tends to rise and fall over time, especially those that offer potentially high returns. Investments that continue to generate regular positive returns regardless of general market conditions are considered suspect.

  • Stealthy or challenging strategies. Investments that are incomprehensible or do not provide complete information. In fact, you do not know where you invest your money, or how to monitor the market. You just pay and wait for the richness to fall on your head. That surely would not work.

  • Problems with paperwork. Excuses are given as to why clients are unable to view the written investment information. In addition, errors and inconsistencies in account statements are often a sign that funds are not being invested as promised.

  • Difficulty accepting payments. Customers do not receive payments or have difficulty withdrawing their investments. Ponzi organizers generally encourage participants to “roll over” their investment and sometimes promise even higher returns on the roll-over amount.

    • If you consider yourself a high-risk investor and still want to try high return programs, carefully watch out for these signs. When some of them start to develop, try to withdraw your investments as soon as possible. Ponzi scammers will exist all the time, and it's a job of every investor to know about them and avoid them.



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