Ponzi scheme.
In plain English
A Ponzi scheme is a fraud that pays old investors with money from new investors instead of real profits, until it runs out of new money and collapses. The person running it promises high returns with little or no risk and reports steady gains, but no real investing is happening behind the scenes. It is named after Charles Ponzi, who ran one in the 1920s. Because the early payouts look real, word spreads and more people put money in, which is exactly what keeps the fraud alive until new money stops coming.
01Why it matters
When a Ponzi scheme collapses, most investors lose the money they put in, and the steady returns that looked safe were the warning sign all along.
02The math, step by step
An operator promises a guaranteed 12 percent return every year. When an early investor asks to cash out $5,000, that money does not come from profits. It comes straight from a newer investor's $5,000 deposit. As long as new deposits keep arriving, payouts continue. The moment new money slows, there is nothing left to pay anyone, and the scheme falls apart.
03What this is NOT
A Ponzi scheme is not the same as a pyramid scheme. In a Ponzi, one operator secretly moves money from new investors to old ones and claims to be investing it. In a pyramid scheme, each person openly recruits others to pay in, and the money flows up through the layers of recruits.
04Receipts
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