Draft:Ponzi scheme

A Ponzi scheme is a fraud, disguised as an  unusually good investment , with  occasional payouts  to those who demand them, despite  exorbitant commissions ;  returns don't come from income/profit/value  as claimed/expected, but  instead from new participants :


 * 1) People invest into it because they expect good profits, and
 * 2) that expectation is sustained by such profits being paid to those who choose to cash out. However,
 * 3) there is no external source of revenue for those payoffs. Instead,
 * 4) the payoffs come entirely from new investment money, while
 * 5) the operators take away a large portion of this money.

In Jazz-age North America, Charles Ponzi became infamous for promoting high-yield (50% in 45 days or 100% in 90 days) investment schemes; profits he claimed came from arbitrage were, in fact, entirely bogus, and he was just paying earlier investors with money from newer ones all along. Ponzi cost his "investors" so much ($20 million, equivalent to $258 million in 2022) that the scheme now bears his name even though he did not invent it.

Related phenomena
The term "Ponzi" is often used for any economic phenomenon driven by a mistaken belief in a mathematical impossibility. Most notably, economist Hyman Minsky's 1992 discussion of the "Ponzi" phase of debt accumulation was widely discussed in the aftermath of the Great Recession.

Pyramid schemes
In common use, Ponzis are confused with pyramid schemes so frequently the two terms are used interchangeably - but they differ distinctly in presentation and operation:

Speculative asset bubbles
In an economic bubble, like in a Ponzi, early participants profit from later participants' contributions. But unlike Ponzis, bubbles aren't created or perpetuated per se by deceit; bad faith isn't necessary because stupidity is more than enough. Civil or criminal consequences can only result only if a party misrepresents the facts of an investment to inflate its value.

However, Blockchain-based token systems like cryptocurrencies (i.e., Bitcoin) and NFTs are a unique case because they're Ponzi-like by design.

Notably NOT Ponzis
No, Social Security is not a Ponzi; neither is reserve banking or fiat currency. See here for a brief analysis of this incredibly tired and oft-refuted lie.