By now you are probably aware of the E-Creator saga that rocked Zimbabwe. The issue is still fresh in the minds of many. Be sure to check out a prior article on the subject. As a follow up it became necessary to revisit what a pyramid scheme is. That article is already up and you should check it out. That discussion in turn necessitated today’s discussion. A pyramid scheme is not similar to a Ponzi scheme. Many people think they are which is not so. That is why today the focus is on what a Ponzi scheme is.

What Is A Ponzi Scheme?

A simplified definition of a Ponzi scheme is that it is a fraudulent scheme where earlier ‘investors’ are paid their promised returns on investment with money taken from new ‘investors’, giving the impression that the scheme is a viable investment. A Ponzi scheme is a scam in which gullible people are enticed to ‘invest’ with the promise of high returns after a short period. That premise is what often leads to a perpetual number of people joining.

The promised returns on investment come from the money ‘invested’ by the new members joining. There will inevitably come a time when the cash outflow (payouts) exceeds cash inflow (‘investments’). That is when the scheme crumbles. The people behind the Ponzi scheme typically have projections of when the scheme will or may crumble. Thus they will vanish with people’s money just before that happens.

Why Is It Called A Ponzi Scheme?

It is because the first person in history to dupe people this way was called Charles Ponzi. Born in 1882, Charles Ponzi, between 1919 and 1920 convinced roughly 40 000 people to invest money exceeding over US$15 million. The promise he used to entice them was that everyone would get a 100 percent return on investment in just 90 days.

What To Note In Identifying A Ponzi Scheme

There are a number of things you can note. Once you see those things at play then you know it is a Ponzi scheme. Here are some of them:

Incredibly High Returns In A Short Time

There will be a promise of super high returns on investment in a very short space of time. For instance, you can be promised to get your investment doubled in say, a week, 2 weeks, and so on. Typically the promises are so shocking you will definitely pause and ponder.

Intense Pressure To ‘Invest’

You will be subjected to intense pressure to join. You will be told that the offer is for a limited time only. This of course will be coupled with the promised returns. This will weigh heavily on your psyche and if you are easily gullible you will acquiesce.

Limited To Zero Transparency

For starters, the scheme will not be registered or licensed in any way. After all, all financial entities ought to be licensed. The scheme will usually be faceless i.e. you will not know who is behind it. There also will be no digital footprint i.e. there will be no online presence that is traceable. It is also typical for there to be no offices or physical locations where you can engage the people or team behind. It also will not be clear what the revenue or business model is. Overall, everything will be shrouded in mystery. There will be countless things you cannot ascertain or figure out.

Nothing Being Sold

For a Ponzi scheme, there will be nothing being sold. It will be apparent there is no product or service being sold. This is one of the reasons it should be easy to spot a Ponzi scheme. This is especially given the fact that it will not be clear how the returns you get will be generated. If no sales are involved then just know other people’s ‘investments’ will be the source of the returns.

Core Distinguishing Factor – Ponzi Scheme Versus Pyramid Scheme

It is somehow understandable why many people conflate the two. This primarily stems from the fact that both schemes resemble a pyramid structure. However, that is not enough basis to conclude they are similar. In a Ponzi scheme the pith of it is one joining and getting or waiting to get their pay out. There are no recruitment or commission dynamics premised on perpetual recruitment. You are simply promised a return on investment and that is it. That is why a Ponzi scheme is typically very easy to spot.

Why? It will be so obvious there is no actual income generation from sales. You will actually wonder because it will be unbelievable how you can just ‘magically’ and passively earn just like that. If you ask how the money is generated you may never get answers; if you do, they will be sketchy.

There is of course that dynamic of zero tangible products or services being sold. The same goes for a pyramid scheme. Another similarity is that of heightened urgency when one is pushed to join immediately. That fear of missing out (FOMO) factor is present in both schemes. You see, that is why it becomes tempting and easy to think pyramid schemes and Ponzi schemes are the same. For a Ponzi scheme, there is no completion of tasks or commission-based recruitment drives.

Let me emphasise that just like pyramid schemes, Ponzi schemes have been evolving. Thus people behind modern-day Ponzi schemes are making them sophisticated. It is becoming commonplace for some culprits to blend tenets of pyramid schemes and Ponzi schemes together.  Add to that you can have other scams mixed in there like pay-to-work, click farming and more. That way it becomes more difficult to discern what the scheme really is. This is actually one of the reasons why people can conflate the two. Otherwise, a Ponzi scheme is about you ‘investing’ and being promised or getting some hefty return. The bottom line is that you should be wary and highly vigilant. You should never succumb to a Ponzi scheme because it is much easier to spot. Like I always tell many people; “Be more aware!”