Ponzi schemes are fraudulent investment scams that promise high returns with little risk for investors. A fake investment mode that pays profits to the initial investor from the money paid by the next investor, so that it seems to make a profit even though the money does not come from the profits earned by the company. These networks will collapse when cash flow slows due to reduced hiring or investors demanding their payments. Not a few Ponzi companies use Bitcoin as a means of payment so users need to be careful in investing Bitcoin in these companies.

Ponzi schemes are fraudulent investment scams that generate returns for previous investors with money taken from subsequent investors. This is similar to a pyramid scheme in that both are based on using the funds of new investors to pay off previous backers. Both Ponzi schemes and pyramid schemes eventually go down when the flood of new investors dries up and there isn’t enough money to spend. At that point, the scheme unraveled.

Example of a Ponzi Scheme

Bernie Madoff: Wall Street broker whose wealth management business was this nearly twenty year old scheme that swindled investors into billions. Madoff’s scheme was revealed by whistleblower Harry Markopolos.
JSG Capital Investments: two Californians promising high returns by investing in “hot” pre-IPO stocks. No actual investment has ever been made.
How does a Ponzi Scheme actually work?

The scheme is based on a fraudulent investment management service—essentially, investors donate money to a “portfolio manager” who promises them high returns, and then when those investors want their money back, they are paid with incoming funds contributed by subsequent investors.

What makes a Ponzi scheme work?

This scheme can maintain the illusion of a sustainable business as long as new investors donate new funds, and as long as most investors do not demand full payment and still believe in non-existent assets that they should own.