Companies that engage in Ponzi schemes focus all of their bitcoin double shaka into attracting new clients to make investments. Ponzi schemes rely on a constant flow of new investments to continue to provide returns to older investors. When this flow runs out, the scheme falls apart.
The scheme is named after Charles Ponzi, who became notorious for using the technique in the 1920s. The idea had already been carried out by Sarah Howe in Boston in the 1880s through the “Ladies Deposit”. The basic premise of a Ponzi scheme is “To rob Peter to pay Paul”. Typically, Ponzi schemes require an initial investment and promise well-above-average returns. Initially, the operator will pay high returns to attract investors and entice current investors to invest more money. When other investors begin to participate, a cascade effect begins. The “return” to the initial investors is paid by the investments of new participants, rather than from profits of the product.
Often, high returns encourage investors to leave their money within the scheme, so the operator does not actually have to pay very much to investors. The operator will simply send statements showing how much they have earned, which maintains the deception that the scheme is an investment with high returns. Investors within a Ponzi scheme may even face difficulties when trying to get their money out of the investment. Operators also try to minimize withdrawals by offering new plans to investors where money cannot be withdrawn for a certain period of time in exchange for higher returns.
The operator sees new cash flows as investors cannot transfer money. Ponzi schemes sometimes commence operations as legitimate investment vehicles, such as hedge funds. Hedge funds can easily degenerate into a Ponzi-type scheme if they unexpectedly lose money or fail to legitimately earn the returns expected. If the operators fabricate false returns or produce fraudulent audit reports instead of admitting their failure to meet expectations, the operation is then considered a Ponzi scheme. A wide variety of investment vehicles or strategies, typically legitimate, have become the basis of Ponzi schemes. For instance, Allen Stanford used bank certificates of deposit to defraud tens of thousands of people.
Certificates of deposit are usually low-risk and insured instruments, but the Stanford CDs were fraudulent. The operator vanishes, taking all the remaining investment money. A pyramid scheme is a form of fraud similar in some ways to a Ponzi scheme, relying as it does on a mistaken belief in a nonexistent financial reality, including the hope of an extremely high rate of return. In a Ponzi scheme, the schemer acts as a “hub” for the victims, interacting with all of them directly. In a pyramid scheme, those who recruit additional participants benefit directly. In fact, failure to recruit typically means no investment return.