Today the terms Ponzi scheme and pyramid scheme are often used to mean the same thing. However, there is a slight difference.
A true Ponzi scheme usually promotes what appears to be a real investment opportunity which investors may contribute to without actually being an affiliate, distributor, and etc. A pyramid scheme, on the other hand, usually requires that participants make a payment for the right to recruit other people into the scheme, at which point they will receive money. They have no real product, the only real money being is the entry fee.
That’s why, when you are considering any investment, online or offline, a good product is one of the key criteria you should look for.
At the end of the day, this is splitting hairs a little. All you need to know is that people lose money in either of these schemes. Avoid them like the plague. Evaluate your business opportunities in a logical manner – and pay particular attention to the product or range of products being offered – and you will easily avoid being caught up in one of these illegal schemes.
The scheme is named after Charles Ponzi, who became notorious for using the technique in early 1920. He had emigrated from Italy to the United States in 1903. Ponzi did not invent the scheme. Charles Dickens’ 1857 novel Little Dorrit described such a scheme decades before Ponzi was born, but Charles Ponzi’s operation took in so much money that it was the first to become known throughout the United States. His original scheme was in theory based on arbitraging international reply coupons for postage stamps, but soon diverted investors’ money to support payments to earlier investors and Ponzi’s personal wealth.
A Ponzi scheme is a fraudulent investment scheme that pays returns to separate investors from their own money or money paid by subsequent investors, rather than from any actual profit earned. The Ponzi scheme usually entices new investors by offering return other investments cannot guarantee, in the form of short-term returns that are abnormally high. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors to keep the scheme going.
The system is destined to collapse because the earnings, if any, are less than the payments. Usually, the scheme is interrupted by legal authorities before it collapses because a Ponzi scheme is suspected or because the promoter is selling unregistered securities. As more investors become involved, the likelihood of the scheme coming to the attention of authorities increases. While the system eventually will collapse under its own weight, the recent example of Bernard Madoff powerfully illustrates the ability of a Ponzi scheme to delude both individual and institutional investors as well as securities authorities for long periods.