Learn how to distinguish a Ponzi Scheme from a Legitimate Network Marketing Opportunity
Ponzi Scheme Definition
Ponzi schemes promise investors a very large return on their investment. Returns are never actually made through business, but only from the investments of new members.
See, the earlier investors receive returns from the money paid into the scheme by the recent investors. The scheme requires a constant flow of investments from new investors to keep it going.
It collapses once there isn’t enough money coming in to pay back the earlier investors. The last ones to invest lose their money.
Charles Ponzi
The scheme is named after Charles Ponzi. In 1920, he took in millions of dollars from thousands of investors, including 3/4 of the Boston Police Force. He attracted people by promising them high returns.
Ponzi told investors that he could double their money within 90 days. He advised them that postal coupons purchased in Europe were worth 6 times as much in the United States. He claimed that he would double their investment through international currency exchange.
People were skeptical of the idea at first. But then he began paying returns to the initial investors, and everyone wanted to give him their money. Even the initial investors were giving him their returns to make a bigger profit.
Eventually Ponzi was investigated and the scheme came crashing down.
Ponzi vs. Pyramid
Ponzi and Pyramid Schemes are very similar. In both, money is taken from new investors to pay returns to the previous investors.
The difference lies in the number of people collecting funds for the scheme. In a Ponzi Scheme, there is only one person recruiting and collecting funds. That one individual collects money from the investors.
Once the initial investors see a return on their investment, they start telling people. Everyone starts to get excited because it is working, and then a flood of new investors come with money in hand.
Pyramid schemes differ because there are many people recruiting others into the system. One person recruits others, who recruit others, and so on and so forth.
Both Ponzi and pyramid schemes end in the same way. They collapse without a pool of new investors to pay returns to the previous investors.
Scam or Legitimate Network Marketing Opportunity?
The following are ways that Ponzi Schemes differ from Legitimate Network Marketing Opportunities.
1.) They do not have a product involved and legitimate network marketing opportunities always have a product.
2.) They often require a large initial investment and legitimate network marketing opportunities require small investments.
3.) They promise that you will make a return on your investment while sitting back and doing nothing, and legitimate network marketing opportunities require work and patience for you to earn a return on your investment.
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