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1  Economy / Games and rounds / 2015 The year of the Ponzi, BE WARNED! on: January 14, 2015, 08:51:48 AM

Image orginally from this post by izanagi

I thought I would give a brief explanation of what a Ponzi scheme is and the dangers in investing your money in them.

What is a Ponzi scheme?

A Ponzi, HYIP or pyramid scheme are generally promoted as investments, sometimes the people running them will say they are investing in the Stock Market or selling a new hot product or on this forum they will say they are investing in Bitcoin or Mining.

The truth is they are lying and they arenít investing in anything.

The way Ponzi scheme works is the people running the scheme will ask for an investment and offer a return on that investment, but because they arenít making any money (by selling something for example) the only way they can pay the interest is by using the money invested.

So for example;

The promoters offers to give a 10% return per month on investments of $1000.

Someone invests $1000 and waits a month.

The promoters takes $100 (10% of $1000) of the original $1000 and gives it back to the investor.

The investor is happy because it seems to be working.

But all the promoter has done is used some of the original $1000 to pay the interest.

So now the promoter has $900 of the original $1000.

If the promoter keeps paying interest on the $1000 he will run out of money in 9 months, since they have already paid the first month interest.
For the scheme to keep working the promotors needs more money from more investors. If no one else invests, the scheme will fail.

At this point though, the promoter will generally ask investors to tell their friends or make posts on forums telling people it works, because the more people who invest the more money there is to pay the interest.

But all Ponzi schemes fail eventually, either when the promoter runs off with the money or the money runs out.

This is the harsh truth of Ponzi schemes.

So why do people invest in them?

Because some people donít know itís a scam.

But there are other people who will invest even when they know itís a scam because if they get in early they can make money.

For example;

If someone invests $1000 and the scheme runs for a year, they will get 12 payments of $100 (10% per month for 12 months) so they will now have $1200. They would have made $200 profit.

But itís extremely risky since no one knows how long the scheme will last or if the promoter will continue to pay the interest.

Most people have heard of Bernie Madoff who ran a billion dollar Ponzi scheme. The people who invested with him early would have made a good return on their money, but the people who invested near the end would have lost it all.

Ponzi schemes are extremely risky and most people will lost their money.

Itís up to you to decide if the risk is worth it, but be careful.
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