Draft:Ponzi scheme

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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:

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

—Professor Jorge Stolfi, State University of Campinas

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

See the main article on this topic: Pyramid scheme

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:

	Ponzi scheme	Pyramid scheme	Notes
The money goes…	…through the scammer as a central "hub"; the scammer interacts with most/all suckers directly	…from the bottom of the scheme to the top toward the scammer, so that suckers only/mostly interact with other suckers near the bottom of the pyramid
Suckers are told…	…deceitfully that the money comes from a secret/esoteric investment strategy, and the scheme is often marketed to high-net-worth individuals	…openly that money comes from product sales or, in more extreme/illegal cases, only from new suckers	Openly ≠ ethically!
The scheme usually lasts…	…rather longer than pyramid schemes because suckers are often convinced to re-invest	…not as long as Ponzi schemes because they require more suckers to sustain

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.