Charles Ponzi developed a scheme in the United States during the early Twentieth Century that defrauded investors by marketing international postal reply coupons. It is a variation on the pyramid scheme.


Elements of a Ponzi scheme:

(1) The promoter approaches investors with the promise of huge financial returns, often through some esoteric investment that in reality does not exist and/or has no chance of working.

(2) The first investors receive the promised reward, either from the promoter or from cash received from later investors.

(3) Early investors will tell others, who become investors after verifying the reward given to early investors. This money is used to pay off earlier investors .

(4) Eventually the scheme collapses with recent investors receiving nothing. The collapse may occur because:

(4a) The promoter disappears (if he or she is smart).

(4b) The scheme is uncovered.

(4c) The scheme starts to unravel when there are not enough new investors to pay off previous investors.


Key elements:

(1) greed on the part of the investors

(2) a mysterious strategy that investors do nor or only vaguely understand

(3) reliance on the testimony of early investors

(4) exponential growth rate


It differs from the classic pyramid scheme on that an investor's return is not dependent on the number of people he or she recruits.


Early investors may continue to reinvest, thereby increasing their exposure while letting the promoter reuse the same money to recruit more investors.


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