what is a ponzi scheme

A Ponzi scheme is a type of investment fraud that lures investors by promising high returns with little to no risk. The scheme is named after Charles Ponzi, an Italian businessman who perpetrated a fraudulent investment scheme that collapsed in 1920. The scheme leads victims to believe that profits are coming from legitimate business activity, such as product sales or successful investments, and they remain unaware that other investors are the source of funds. The operator pays high returns to initial investors from the investments of new participants, rather than from genuine profits. The schemer pays a "return" to initial investors from the investments of new participants, rather than from genuine profits. Ponzi schemes can maintain the illusion of a sustainable business as long as new investors contribute new funds, and as long as most of the investors do not demand full repayment and still believe in the non-existent assets they are purported to own. Ponzi schemes sometimes begin as legitimate investment vehicles, such as hedge funds that can easily degenerate into a Ponzi-type scheme if they unexpectedly lose money or fail to legitimately earn the returns expected. The hallmark of a "successful" Ponzi scheme is that early investors will receive their payouts as promised, and they spread their tales of success to unwittingly entice new investors. Ponzi schemes inevitably inflict financial damage on most of their investors and divert savings from productive investment. If left unchecked, they can grow exponentially and cause broader economic and institutional damage as well, undermining confidence in financial institutions and regulatory authorities and creating fiscal costs if bailouts occur. They can even lead to political and social instability when they collapse.