If you ever have someone come up to you and offer you some outrageous annual return on your investment, red flags should instantly fly. Anyone who can offer ridiculous short-term returns might just be running a Ponzi scheme.
Charles Ponzi
Charles Ponzi was born in 1882 in Italy. He is the man behind the scam known as a Ponzi scheme. Ponzi was arrested in 1920 after being charged with 86 counts of mail fraud and owning roughly $7 million (Biography).
The Scheme
The Ponzi scheme is absolutely brilliant. It is a complicated process of constantly paying a previous investor with the next investor’s money to give the appearance of a huge return. Let me explain with an example. Charles Ponzi goes up to an investor and tells him he can get him a 50% return on his money in 45 days or a 100% return in 90 days (Biography). He takes that investors money and doesn’t actually invest it in anything. He goes up to a second investor and tells him the exact same thing. He then proceeds to give a portion of investor two’s money to investor one. This gives the appearance that he is actually providing the returns.
While he wouldn’t make $7 million from doing this with only two people, he would make it from doing this hundreds and hundreds of times. The most often end to a Ponzi scheme is running out of new investors. The only way for the scheme to stay alive is to constantly get new investors to put in new money. The idea is to keep doing this for as long as possible, then to steal all of the money you currently have at some point.
When a Ponzi scheme starts to unravel, it unravels extremely quickly. The reason it does this is when one investor hears that the ‘investment opportunity’ is actually a scam, it doesn’t take long for it to hit the media and then every investor is trying to withdraw their money at the same time. Obviously this is not possible as the Ponzi scheme manager is juggling the funds to make investors happy. He can at no point pay out what is all owed.
Recent Ponzi Scheme
One of the most recent and most interesting Ponzi schemes is with someone who actually didn’t steal cash at all. He stole Bitcoins. Bitcoins are an online currency that is becoming more and more prevalent around the world. They can now be used on some major sights to purchase goods. A man with screen name Pirateat40 ran a Ponzi scheme with Bitcoins offering a high rate of return on the coins (DT).
Pirateat40 ended the Ponzi scheme with over 500,000 Bitcoins. When he stole the Bitcoins they were worth approximately $12 a piece, giving him a Ponzi scheme take in of $6 million. However, Bitcoins in recent times shot up to over $250 apiece. If he held onto the coins he would have $125 million worth (DT).
The thing that makes this particular Ponzi scheme so cool and effective is that the entire scam was done over the internet. Pirateat40’s identity was never revealed and it is impossible for anyone to track him down. He took the millions of dollars’ worth of Bitcoins and slipped away into the dark.
Conclusion
There is an old saying that my father has told me countless amounts of times; If it sounds too good to be true, it probably is. That is exactly the case with Ponzi schemes. Ponzi schemes are still around today and should be looked out for. The next time you hear someone offer you an incredible short-term return you should think to yourself, “Am I about to become the next victim in a Ponzi scheme?”
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How to Evaluate a Single Value Stock
Sources: http://www.biography.com/people/charles-ponzi-20650909
http://www.dailytech.com/Pirateat40+Makes+Off+56M+USD+in+BitCoins+From+Pyramid+Scheme/article25538.htm
