What is a Ponzi Scheme?
A Ponzi scheme is a fraudulent investment program that uses funds from new investors to pay earlier investors at fake high returns. Ponzi scheme operators deceive investors into thinking that there is a genuine investment or business operation responsible for producing the incredible returns when in fact there is no underlying business.
The first few investors are paid the expected high returns to create trust and attract more investors. As the number of investors grows, it becomes more and more difficult to honor the fake high returns to a participant who invested earlier.
A point will be reached where cash outflows exceed cash inflows. This is the stage where the entire Ponzi scheme becomes unstable and start collapsing. It is at this point where Ponzi scheme administrators shut down the investment program and disappear with huge amounts of money from investors. However, many con artists do not wait for this critical point; they disappear when they feel they have collected enough money.
To prolong the Ponzi scheme, operators encourage investors to keep their money or investment funds in the scheme as long as possible. This is achieved by various means and techniques such as stipulating exponentially higher interest for participants who invest for more extended periods.
2. The Most Common Types of Online Ponzi Schemes
2.1 High Yielding Investment Programs (HYIP’s)
HIYP is an acronym for High Yielding Investment Program. HYIP emanates from a scheme in which many people who could not afford to act individually brought their money together to form a pool of funds that could be invested in a high yielding but high-risk business such as forex trading. If the pool made profits, then the money would be shared proportionately amongst members who contributed to the funds. In those days some individuals with a sizeable amount of cash could afford to invest in high-risk areas such as forex trading.
However, that was then, and this is now. Those type of HYIP’s doesn't exist anymore. Modern day HYIP’s are a type of a Ponzi scheme operated by an individual who promises unsustainably high returns to investors without the intention of actually paying out the investors’ money. Like all Ponzi schemes, HYIP’s do not have an underlying business or investment that generate income.
HYIP schemes disguise their fraudulent operations in many forms. Some claim to be experts at investing in stocks and trading forex. Then there are HYIP’s that claim to generate huge profits from super-intelligent gambling robots based in casinos across the world. Experienced investors know that all the alleged sources of profit generation do not exist.
HYIPs are promoted and advertised in websites called HYIP monitors. As the name implies, HYIP monitors track the performance of HYIP’s on behalf of investors by checking whether they are still paying or not.
2.2 Bitcoin Cloud Mining
Unlike in the past, the bitcoin mining process requires vast computing power that is not within reach of an average bitcoin enthusiast. Bitcoin cloud mining enables bitcoin mining companies to allow individual investors to take part in bitcoin mining without personally buying computing equipment. Individual investors directly buy computing power to mine bitcoins from the big companies through their bitcoin mining websites. The bitcoins produced by the individual's purchased computing power are transferred to them hourly or daily.
The problem is that very few of this bitcoin cloud mining companies are legitimate. Many of them are just glorified Ponzi schemes hell bent on ripping off investors. Finding a legitimate bitcoin mining company that offers reasonable returns is almost mission impossible.
Mining of bitcoins used to be extremely profitable in the past. Individuals would make as much as 20% or more profit per month from mining bitcoins. But things have changed, and mining bitcoins is no longer as profitable because of stiff competition and halving of bitcoin mining rewards that happens 210 000 blocks mined.
Even legitimate bitcoin mining companies such as Genesis Mining no longer seem profitable as investors receive a return as little as 0.5% per month when their expectation was at least 5 to 8% per month.
It is, therefore, advisable to stay away from bitcoin mining companies because about 99.9% of them are just scams.
It is very easy for anyone to start their own fake bitcoin mining website. Many people who are new to the world of bitcoins are targeted daily. Don’t let it be you. Be wise and avoid all cloud mining services.
A better alternative to investing in cloud mining is to learn how to trade bitcoins or cryptocurrencies. Alternatively, buy bitcoins in bulk and keep them in a safe place, hoping that their price will appreciate over time as many bitcoin experts are predicting. And if the price increases at a faster pace as has happened from time to time in the past, you can make a lot of money by just holding bitcoins and not doing anything with them.
2.3 Advertising and Revenue Sharing Programs (Revshare)
Advertising and revenue sharing programs offer investors the opportunity to share in the advertising revenue generated by the company. People invest in the company by buying advertising packs (ad packs) which allow ad pack owners to advertise their businesses in the company while earning a share of the profit generated by the company. The ad pack owners are required to watch at least 10 adverts per days as well.
However, closer scrutiny of advertising and revenue sharing programs reveal that they are all Ponzi schemes as the advertising services are primarily bought by shareholders themselves (ad pack owners). Reputable companies and private business do not advertise in revenue sharing companies as the cost of advertising are highly overpriced, and the quality of the traffic is extremely poor.
Advertising and revenue sharing programs are very common these days; many companies tend to advertise their programs in popular traffic sale websites such as Clixesense, Traffic Monsoon, Neo Bux or My Advertising Pays (MAP).
Whereas Clixense and Neo Bux are legitimate advertising companies, Traffic Monsoon, and My Advertising Pays are not; they are your classic Ponzi schemes disguised as advertising and revenue sharing programs.
Clixesense and Neobux sell advertising services to mostly junk traffic; they are not offering any revenue sharing opportunities.
On the other hand, Traffic Monsoon and My Advertising Pays provide advertising services as well as opportunities to share in the revenue generated by buying or investing in their advertising packs.
Traffic Monsoon rewards investors who buy their advertising packs for $50 by returning $55 to their pockets in $55 days (about 2 months) – that’s a profit of $5 dollar for every add pack purchased. My Advertising Pays promises a profit of 20% per adpack purchased over a period of 3 months.
These 2 organizations dress up their Ponzi schemes in smoke and mirrors to such an extent that they come across as legitimate advertising business service. When in fact they are just using funds from investors to pay out those who want to withdraw. There is no external advertisers or reputable organizations who use Traffic Monsoon services.
Because the returns they pay to the investors are not as high as your typical HYIP Ponzi schemes, they tend to be around for longer than usual for a plan of Ponzi. Additionally, encouraging investors to keep their money in the system by reinvesting their profits helps to prolong the lifespan of these programs.
What makes advertising and revenue sharing programs devastating are that almost all the investors are not aware that they are in a Ponzi scheme, and they have to invest a lot of money to earn a substantial income from their investment. For the ones who are lucky enough to make a profit it’s great. But for those who fall into the category of losers, it is sorrowful as many of them lose an insane amount of money.
My Advertising Pays and Traffic Monsoon are just 2 examples; there is a lot more similar programs out there. The unfortunate part is that clever marketing and mob psychology tactics make it very hard to convince people that these advertising and revenue sharing programs are Ponzi schemes.
2.4 Miscellaneous Ponzi Schemes
Besides those mentioned already, there are much more types of Ponzi schemes as professional scammers are very creative, and so they are always innovative too.
Other popular online Ponzi schemes are disguised as manufacturing, recycling or oil companies that will typically allow you to buy and own a share in one of their production machines, department, workshop, etc...
Other Ponzi schemes are presented as work from home opportunities, internet based businesses, or even a farming business whereby you are allowed to own a cow or some sheep at some distant farm.
Ponzi schemes are not just happening online; many more Ponzi schemes are promoted offline through family members, friends, community halls, tea parties, etc.…
The people we trust the most are not immune from betraying us. Crimes of Persuasion website has an extensive list of church pastors, police officers, fire-fighters, doctors, school teachers, lawyers, portfolio and investment managers who have been tried, convicted and sentenced for operating all kinds of Ponzi and pyramid schemes. So you must always be alert and on the lookout for Ponzi schemes, particularly when a business or investment programs is offered.
3. Signs of a Ponzi Scheme
Barring a few exceptions, the vast majority of Ponzi schemes are easy to spot. Important Red Flags to look for when trying detect if an investment scheme or business is genuine or just another Ponzi scheme are listed below.
Red Flag 1 – Too Good To Be True
'Too good to be true' returns is a sure sign of a Ponzi scheme. It does not make sense for a company to promise you a guaranteed return of at least 20% per month when they could use their own or borrowed funds to make themselves instead incredibly wealthy.
Extremely high returns appeal to potential investors because of emotions of greed they elicit. Bear in mind the thought that just because a program offers a realistic rate of return does not mean it is legitimate. You must still do your research and be on the lookout for other red flags.
Red Flag 2 – Promises of Guaranteed Returns
If an investment program promises you guaranteed returns run, all investments with good returns involve some risk. Just because website administrators state that they have insured you against losses does not make it real until they provide indisputable evidence to that effect.
Reg Flag 3 – Use of Anonymous Payment System Only
Companies who use anonymous payment systems such as Payeer or bitcoin only may be hiding their true identities and should be avoided all costs. Look for investment programs that use transparent payment systems such PayPal, Visa or MasterCard.
Red Flag 4 – Unregistered Company
A company that is not registered is a red flag. You have no protection whatsoever should something go wrong. If there is a lack of transparency and the business fails to produce documentation as proof that the company is registered, then stay away.
Red Flag 5 – Use of Fake Video Testimonial or Pictures
Con artist like using fake video testimonial to entice you into joining fraudulent programs. As part of your research, check if any of the people on testimonials do not correspond to famous actors on Fiverr.
Red Flag 6 – New domain names or websites
A scam artist is always starting new websites to avoid detection or start new scams entirely. So avoid investment programs with domain names that are new.
Red Flag 7 – Fixed or constant returns
By their very nature, authentic investments returns tend to vary from week to week or month to month. A red flag should be raised when an investment return rate is a fixed percentage of your investment as if you were loaning them money.
Red Flag 8 – Hidden or Vague Business Model
This is a big red flag. Unless you understand the business model, then stay away from it. That’s why investment in bitcoin or ethereum mining is so dangerous; it is tough to verify if real mining is taking place in sufficient quantities. Also, if there is little or no background information about a company, then you should be suspicious. Other companies change their names to leave their bad company history behind.
Red Flag 9 – Owner Hiding His Identity
If the owner hides his identity, then, stay away. However, the availability of the owner's identity does not make the business legitimate. They could be using a false identity. You must be suspicious if the name of the owner or administrator of the company or website does not show any results in Google or LinkedIn search. Besides, some scammers don’t mind exposing their identities as they have set up their Ponzi schemes in such a way that it will be difficult to prove guilt on their side. Charles Scottville of Traffic Monsoon and Genesis Mining directors are good examples of this.
Red Flag 10 – Owner has a history of being investigated or failed businesses
Avoid joining businesses or investment programs of people who have a history of failed businesses or have been investigated previously.
4. How Long Do Ponzi Schemes Last?
By design, most Ponzi schemes are created to be around for a short span of time. They can last for as short a time as a week, or even less. In rare cases, some Ponzi schemes can survive for 2 or more years.
Charles Ponzi, real name Carlo Ponzi, whose name was permanently associated with these ‘rob Peter to pay Paul’ schemes scammed his victims more than $20 million over a period of about one year.
Bernie Madoff, on the other hand, managed to operate his Ponzi scheme for more than 18 years, resulting in a net loss of at least $7.2 billion for his investors.
Bernie Madoff Ponzi scheme was a good example of a Ponzi scheme that had an extremely long life. However, most online Ponzi schemes have a lifespan that only extends to a few months at most.
Poker Automatics, poker gambling bots, was one of the longest running HYIP programs, it lasted for 4 years before going bust and disappearing with millions of dollars from its investors. Forex Paradise is another HYIP program that has been operating for a period of more than 2 years as at the time of writing this post. Poker Automatics and Forex Paradise are an exception to the rule.
It is important to understand that no one knows how long a Ponzi scheme is going to be around. Some people believe that when they participate in a Ponzi scheme while it’s still new, they will have a good chance of success. That’s a mistaken belief as a Ponzi scheme can stop paying out within a few days or weeks.
5. Final Thoughts on Ponzi Schemes
Ponzi schemes are operated by skilled con artists who exploit people's greed by promising them get rich quick schemes. Unfortunately, by design, the schemes are not sustainable. They aim to attract as many people as possible so that insane amount of money can be generated for the scammers.
When the scammers feel they have made enough killing, they stop paying out investors and disappear with the loot, leaving the majority of investors penniless and in agony. After disappearing, they will open another website and promote a new Ponzi scheme. Very often, they HYIP administrators operate several Ponzi schemes at the same time.
Investing early in a program early does not guarantee in any way that you will be in profit at the end as these programs do not necessarily pay all early investors. Those who invest huge amounts of money are less likely to be paid even at early stages of the program.
Remember that once you hand over your money to a Ponzi Scheme, you have given control to the con artists. You will be at the mercy of the scammers while the program is running, it will be up to them to decide what to do with your money.
Moreover, by knowingly participating in a Ponzi scheme you are supporting scam artists for a chance to make a pittance compared to the financial killing that scammers make.
Even if you’re lucky enough to be paid and make good money from Ponzi schemes, your luck will eventually run out because, in the long run, get rich quick schemes just do not work. There is no substitute for working smart or hard (preferably both) for your money. Rather invest in yourself (learn forex trading or online marketing etc...) than in a program that you think will automatically generate money for you.