A type of investment fraud in which old investors are paid out from an influx of new investors. These type of schemes are ultimately unsustainable and are destined to collapse when outflows exceed inflows or the operators abscond with the funds. There are five distinguishing characteristics of a Ponzi scheme:
- Investors put money into the scheme because they expect profits
- Investors expectation are temporarily sustained by such profits being paid to those who choose to cash out.
- However there is no external source of revenue for those payoffs.
- Instead the payoffs come entirely from operators of scheme bringing in new investment money.
- And the operators run away (i.e. abscond) with a a large percentage of the funds.
The mechanism by which new investors are brought in, and by which the operators remove investors from the scheme may vary between schemes. Ponzi schemes may present as direct investment vehicles such as funds like Bernie Madoff's fund Madoff Investment Securities LLC. Ponzi schemes may also present as a fraudulent market maker where investors are sold zero income greater fool investments and the operators abscond with money through market manipulation.
Some participants can make money investing in Ponzi schemes, but the basic fact is that most participants will lose money. Thus Investing in Ponzi schemes has a negative expected return and are negative sum.
Crypto assets are often referred to as market-obscured or self-organizing Ponzi schemes because of their nearly identical payout structure.
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- Investor.gov Ponzi Scheme