Ponzi vs. pyramid schemes: What’s the difference?
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The fraudulent investment program known as a Ponzi scheme entices investors with the promise of extremely high profits.
The Ponzi scheme is named after Charles Ponzi, who gained popularity in the early 20th century for employing this method. It operates on a deceptive premise, where the returns paid to earlier investors come not from legitimate profits but from the investments of new participants. These schemes depend on a continuous infusion of new investors to support payouts because they lack a legitimate underpinning of commercial activity.
Ponzi schemes are infamous for their lack of transparency, frequently giving only vague or inaccurate information about how they work. These schemes are ultimately unviable and inevitably collapse when the flow of new investors decreases, leaving many investors with substantial losses. Ponzi schemes are illegal in most jurisdictions due to their fraudulent character, and authorities fiercely pursue them to protect investors from financial harm.
One of the most well-known Ponzi schemes in the financial sector was created by Bernie Madoff. His Ponzi scheme was discovered in 2008 after he acknowledged running a bogus investment company for many years. Madoff deceived his clients by pretending to be a legitimate investment firm and making them promises of consistent, large profits. But rather than really investing the money of previous investors, he used additional investments as leverage to pay rewards to them.
Madoff fabricated financial statements for years to keep up the appearance of success in this scheme. As a result of the scheme’s final collapse during the global financial crisis, hundreds of investors suffered enormous losses, and one of the biggest financial frauds in history was exposed. Later, Madoff was detained, found guilty, and given a 150-year prison term for his part in running this Ponzi fraud.
Content retrieved from: https://cointelegraph.com/explained/ponzi-vs-pyramid-schemes-whats-the-difference.
