Definition
A kind of investment fraud where a schemer utilizes someone’s funds to pay as returns for someone else is called a Ponzi scheme, meaning the payment of a pre-existing investor is used to pay as returns to a new investor.
Understanding the term
The first time people used the Ponzi scheme definition was during the 1920s when renowned fraudster Charles Ponzi pulled off this type of investment fraud scheme for the first time. Since then, the term “Ponzi” has become synonymous with fraud within the financial world.
Investors are lured to a Ponzi scheme without their knowledge by promises of guaranteed returns. But what they do not suspect is that the return payment they receive is actually the investment contributed by a previous investor.
Usually, Ponzi schemes take the form of a portfolio manager that unsuspecting investors end up trusting to get a high ROI. But in the crypto markets, there have been several ICO projects that turned out to be grand Ponzi schemes later, such as OneCoin. OneCoin started off as a promising investment that aimed to become the next Bitcoin, but regulators discovered that it was a large-scale Ponzi scheme.
Takeaways
For long-term survival, Ponzi schemes mainly lure in first-time investors for a constant supply of fresh funds from new contributors to pay off the others.