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How to detect and avoid Ponzi Schemes

How to Detect and Avoid Ponzi Schemes
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(Last Updated On: March 26, 2022)

If you have lived long enough you must have seen or have been swindled by a Ponzi scheme at one time or the other.

Ponzi Scheme is simply a dubious business model where by people are lured to invest into a in fake business idea or proposition with the promise of an uncommonly high return on Investment (ROI) within a short period of time.

The initial people that joins the scheme first are usually paid by the mastermind behind the scheme with his own money (could be money gotten from other schemes also).

But after the early members have been paid, they will now be the once to help promote and get new members into the scheme for them to continue to get paid.

Then the money brought in by new members will be cycled round to payout older members who have already invested earlier and then new member will also get paid later in the future with the money of other new people that will join after them.

Unfortunately, the scammers behind this businesses are usually smart sales guys who know how to tell a good story and sell a dream.

So, what they will do is that they will create a false business with an investment plan and then turn around and start convincing people to invest in it with the believes that they will get their money back and with some large profit.

The trick here is that the ROI is usually high and is very tempting and hard to come by.

The returns can be as high as from 50% to more than 100% profits within a very short period of time like a month or couple of months.

This are results that you know that cannot be gotten anywhere in a traditional investment plan, because most times the best you can get is around 5 – 7% and this is depending on the investment vehicle you are using and if you go deeper enough you could find smart investors that can do 9 – 12% but that is it.

However, to the credit of this schemes, they usually try to put up the initial money to pay the early investors so that they can use their testimonials to lure others people in.

The system of recruiting works 99% of the time, especially when it is someone you know and they have actually invested and are getting paid, their words are usually strong and effective in inviting others to join the scheme.

And as long as enough people continue to join with more money, the scheme will continue to pay out the old investors.

The rug pulling that always happens for every Ponzi scheme is when people stop joining and then there is no longer enough money to offset earlier due payments.

When people stop receiving their due payouts, that is when they will wake up and realize that they are been played.

How to identify a Ponzi Scheme

There are many ways to identify these schemes, I will try to highlight some, but I will also warn that the people behind these schemes are getting smarter by the day and are beginning to cover some of their tracks.

So, while you read these methods, also continue to look out for other methods and more importantly use your intuitions at every time before making any bogus investment.

Too high Return on Investment

A high ROI should actually be the number one kicker when it comes to identifying a Ponzi Scheme.

Investing is said to be the surest path to wealth, however, the reason why many people still don’t invest is because it really takes time to start making anything worthwhile from investing.

When you invest in a business or any assets, the essential thing you are saying is that you don’t have any urgent need for that money and you believe investing it into a project or business will grow it over a period of time (many years).

When you invest you are not expecting a quick return or even a large return in a short while for that matter.

So, when you see any business that is promising you a very high ROI over a short period of time, you should be wary about it, it is most likely a Ponzi scheme or something worse.

An unclear investment asset

An unclear investment asset is also an easy way to spot Ponzi Schemes.

When the business you are investing in does not have a clear asset portfolio that will guarantee that it will make a lot more money than it is promising to pay, that in itself is a clear red flag that it is most likely a dubious business model.

There have been cases where the Ponzi Scheme promoters will tell the prospects that the business makes its money through;

  1. Trading of stocks 
  2. Trading of cryptocurrency
  3. Investments in agriculture
  4. Investment in real estate
  5. Loan arbitrage
  6. Investment in crude oil and many others

However, if you inquire for more information, they will not be able to provide it and most likely they will become angry.

In most cases they will be quick to dismiss you and say they don’t need your money anyways, that they are only trying to help you.

It is important that you do not fall for that reverse psychology of trying to feel insulted and unappreciated.

The trick is to make you feel bad for not trusting them and then you will go ahead and give them your money, by the way the profit is very inviting already.

***Please note that the above-mentioned businesses are all good businesses that are very profitable. However, in this case the Ponzi Schemes are not actually into any of them, but will claim to be.

 It operates like an MLM

Multi-Level Marketing (MLM) is in it self a very good business model, but don’t be deceived because many MLM out there are all Ponzi Schemes.

Whenever, you notice or are told that your returns depends on you signing up new member, then there is a high chance that it is a Ponzi Scheme.

Because the whole operation of a Ponzi Scheme is recycling of money and it is dependent on old members convincing and signing up new members (that will bring in new money).

If at any point the old members are no longer bringing in new members (new money) then the scheme will crash.

In this scheme you will notice that they usually employ aggressive campaign of trying to recruit new members and even sometimes bonuses are promised to new members so as to encourage them to join.

 Inconsistent payout schedules

This is a critical factor to look out for if you have already joined the Scheme without knowing.

You will notice that sometimes (or even frequent in most cases) that there is inconsistent payout of the promised returns.

When this happens, it could be as a result of insufficient new members joining the scheme and thus there is no enough money to pay to old members.

If you notice this, just be aware of what you might be into and start making your exit plan.

Some popular schemes that have wiped out peoples money includes:

SchemeFounderValue ($)Date EndedOrigin
MMMSergei Mavrodi10B1994Russia
CaritasIoan Stoica1B – 5B1994Romania
Madoff InvestmentBernie Madoff65B2008US
Stanford Financial GroupAllen Stanford7B2012US
Mutual Benefits CompanyJoel Steinger1B2003US
Petters Group WorldwideTom Petters4B2003US
MoneytronJean-Pierre van Rossem860M1991Belgium
Great Ministries InternationalGeral payne500M1997US

If you want to save yourself from any financial loss as regards to Ponzi’s, then re-read and make sure that you understand every point noted above.

PS: please list other indicators that you have noticed (that was not listed above) in the comment sections and also share it with your family and friends so that they don’t loose their hard earned money to Ponzi.