What Is A Ponzi Scheme And How Does It Work

What is a Ponzi Scheme and how does it work? If you come here asking that question then you’re in luck. 

Within my article today I’ll be answering that question along with how to spot them and more importantly how to avoid them.

But first I must congratulate you for taking time out of your day to research this topic, because many people will just keep getting scammed and never do anything about it.

However I can clearly see you’re different, since you’re here reading my article.

So without wasting any more time, let’s get right into it!

What Is A Ponzi Scheme?

A Ponzi Scheme is where someone promises that the investments you make toward them will give you a certain amount of money in return.

However instead of your money actually being invested in whatever they promised you, they instead pocket your money and pay you your “profit” from earlier victims that were lured into the scam. 

This is why you’ll hear Ponzi Schemes sometimes also be called robbing peter to pay paul — since you aren’t actually earning money from products but rather from earlier investors. 

Now these things can keep going on as long as people are being recruited and investing money into whatever scheme they are presented with.

However once recruitment starts slowing down or too many people start asking for refunds — you’ll probably be given a smaller profit or told that your investment failed altogether. 

And once this happens it’s already too late and you’ll never get your money back — and more than likely the con artist has gone on to create another Ponzi Scheme to attract new victims.  

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How to Spot a Ponzi Scheme

Ponzi Schemes aren’t always the easiest things to spot, and if you aren’t careful you can quickly get scammed into one before you know it.

However they’re some signs you can look out for that will help you spot one before you ever become a victim to them.

So here are 3 red flags that you can keep at eye out for that will help you identify if you are dealing with a Ponzi Scheme or not. 

It Promises You’ll Make A Lot Of Money Without Much Risk

Most of the time Ponzi Schemes will guarantee you can make a lot of money within a very short amount of time with little to no risk.

For example they might say you will earn a 40% profit within 2 – 3 months time. 

However as I’m sure you’re well aware, there’s no such thing as a guaranteed return on a profit in real life — otherwise everyone that does stock would be millionaires right?

So if you ever see a program or person saying something along these lines, it’s best to leave and never look back.

You Have No Idea Who You’re Dealing With

I’ve come across many programs that claim you can make a lot of money if you invest money into them — however information about the CEO is also usually nowhere to be found.

And obviously whoever has created the program or software knows that they are scamming people — so naturally they don’t want their identity to be out there for everyone to see.

So again before investing your money into anything, make sure you know who is behind the company / program you’re looking at. 

It Says They Are Using Secret Strategies 

Whenever you hear someone say that they can double or triple the money you invest with them through some sort of advanced method or secret strategy that’s never been used before — then more than likely they are trying to deceive you.  

Because if they can’t come out point blank and tell you how their method works and show physical proof of what your money is being invested in — why should you believe anything they say in the first place right?

So unless you are 100% sure you know where your money is going — then simply don’t invest your money with them. 

Ponzi Scheme Examples 

One of the earliest Ponzi Schemes to ever exist was from a man named Charles Ponzi — which is actually where the name originated. 

What he did while working at the postal service was promise people they would earn 50% profit within 45 days or 100% profit within 2 months by buying discounted coupons from other countries and exchanging them for a higher price within the U.S.

What he was doing though was simply paying the earlier investors with money from people who recently joined.

However after a year of running this scam, it collapsed and made his clients lose millions of dollars. 

Now a more recent Ponzi Scheme that you can relate to is from a company called It Finance — which I did a review on not too long ago. 

They claimed on their homepage that you will make 156% – 244% profit within 40 – 120 days by investing cryptocurrency into their platform.

What Is A Ponzi Scheme And How Does It Work - Claims you'll make a lot of money quickly

However this company doesn’t actually sell any physical or digital products on their website, but rather your only making money by people who joined this program earlier on. 

And as you can tell, this company is clearly promising you’ll make a lot of money within a short amount of time — which is one of the red flags I just mentioned for you to look out for.

Pyramid Scheme Vs Ponzi Scheme

Many people ( myself included ) get Pyramid Schemes and Ponzi Schemes mixed up, and basically say that they are the same thing.

Now while yes in both cases you end up losing money, how it happens is very different.

Ponzi Scheme:

As I’ve already mentioned, a Ponzi Scheme is where someone recruits you into a “ get rich scam” by promising you’ll make a lot of money very quickly on your investments. 

However all they do is pocket the money and if you’re lucky enough pay you from other people’s “investments”.

What Is A Ponzi Scheme And How Does It Work Ponzi Scheme example

Pyramid Scheme:

A Pyramid Scheme starts out where someone recruits you into their team and promises you’ll make a lot of money by also recruiting people and building your own team.

However as more and more people get recruited into the program, the amount of money people make starts to slowly dwindle until only the people at the very top of the pyramid are generating an income.

Then eventually the pyramid simply falls apart leaving everyone who joined later into the company with nothing but a big pile of debt.

What Is A Ponzi Scheme And How Does It Work - Pyramid Scheme Example

Now if you’d like a visual description between the differences of these two scams, you can watch this short 3 minute video that describes them simply and to the point. 


How to Avoid a Ponzi Scheme

The easiest and most simple way to avoid a Ponzi Scheme is to know what your money is being invested into, and who the person is that’s doing your investing.

Make sure to ask them questions like how it works, who has made money with them in the past, and what the risk of failure is. 

If they can’t answer these simple questions, then you’re better off leaving and not dealing with them at all.

Also if you’re still unclear if you’re dealing with a Ponzi Scheme or not, simply remember the red flags I told you to look out for and you should do well in avoiding them in the future. 

My Final Thoughts

The internet is full of thousands of Ponzi Schemes, and new ones are popping up each and every day. 

Hopefully though after reading my article you’ll realize how to spot them and avoid them altogether. 

Because at the end of the day investing your money is going to carry a risk, and you could earn a profit or lose it altogether.

Now while investing your money into the right things is a smart thing to do — at the end of the day you still need a source of income to fund your investments.

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All you do is simply create helpful content that points people towards products they’re already looking for  — then get paid a commission each time they buy something.  

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I hope now you understand what a Ponzi Scheme is, and more importantly know how to spot and avoid them.

But if you have any questions or want me to look at a program to tell you if it’s a scam or not — leave a comment below and I’ll be happy to help you out. 🙂

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6 thoughts on “What Is A Ponzi Scheme And How Does It Work”

  1. I’m looking into this at the moment because I’m interested in multi-level marketing and affiliate marketing and I hear people talking about Ponzi schemes which I couldn’t quite define in my own mind. All three are different I think – MLM, affiliate marketing and Ponzi schemes. Thanks for the information, explanations and comparisons. 

    • You’d be correct that MLM’s, affiliate marketing, and Ponzi Schemes are different.

      This is because an MLM business and affiliate marketing are two different ways someone can go about making money online.

      However if someone uses one of these business models and tries to scam you out of your investments — that’s when it turns into a Ponzi Scheme.

      So while becoming an affiliate marketer or joining an MLM is safe ( even though I prefer affiliate marketing ) — just be careful because any opportunity you try out could potentially be a Ponzi Scheme if it was created with the wrong intentions. 

  2. Ponzi schemes are not really a good line of business to follow as there are a lot of defects in its operation. Over time I have been involved in some many Ponzi schemes and I must tell you its only good if you join the first set of persons that joins, as it always the last set of persons that suffer the losses.

    • While it’s true that you’re more than likely to get your “investment” back if you join a Pozi Scheme right when it launches — I would never say it’s good to join one.

      Because at the end of the day you’re simply joining a scam, and the people you are involving yourself with are unethical and stealing people’s money.

      So personally the only thing I would do is report the company / person as a scam — and tell all my friends and family to stay away from it. 

  3. Hello there! 

    Thanks for this great article here, as it has helped me tremendously in learning what a Ponzi Scheme is. 

    I wonder what these persons gain from defrauding others of their hard earn cash, I just pray many people in the online world gets to see this post so they can learn also.

    • Basically what they gain is a lot of money unethically from people. Then as I mentioned within my article, once they’ve been caught in their scam, then simply close their program and open another one in its place.

      That’s why I tell people it’s very important to review any company or opportunity you want to invest your money into — because there are a lot of shady people out there who will try to steal your money without batting an eyelash.


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