Ponzi scheme
Also called: pyramid scheme
A fraud that pays existing investors with money from new ones, until new money stops arriving.
No investment happens. Money from new participants is handed to earlier ones and described as returns.
This makes the early experience genuinely excellent. Payments arrive exactly as promised, statements look professional, and early investors tell everyone they know — which is precisely the recruitment the scheme requires. Their honest enthusiasm is the marketing.
The mathematics guarantee the ending. Paying returns out of deposits means the money owed grows faster than money coming in, so collapse is not a risk but a certainty, with only the date unknown. When it arrives, the money is not “lost” in a market sense — it was spent years ago.
Warning signs, in rough order of usefulness: returns that are steady regardless of what markets do; difficulty withdrawing, or pressure to reinvest instead; the strategy being secret or “too complex to explain”; and recruitment being rewarded.
Steady returns are the strongest signal. Real investments have bad years. Something that pays 1.5% every month for four years is not an investment that avoided the downturns — it is a spreadsheet.
Words on this page
- Market — All the buyers and sellers of an asset together — nobody sets the price from above.
- Risk — The chance that an outcome is permanently worse than you needed it to be.
Related terms
Covered properly in Learn.
This term appears in the glossary of The Quiet Fortune, Volume II.