Imagine if a friend walks up to you and tells you about this sweet investment. It has a high return rate. He gives you little or no details about what kind of venture you are putting your money in to. All you have to do is give up a few thousands of Naira. Wait for a given period, and watch your money double or triple. Please walk away, it’s probably a Ponzi scheme. Ponzi scheme is an investment scheme you should avoid.
Ponzi schemes have existed since the 1920s, and it has continued to be an illegitimate form of investment. Unfortunately, not all Ponzi schemes look the same, which makes it quite hard to spot until you become a victim.
How Do Ponzi Schemes Work
Although the Ponzi scheme has a specific formula, there are many ways to deploy. They pop up at every other time with a different level of operation, so you don’t get to see them all on headlines.
Ponzi schemes revolve around the process of paying old investors with the money you get from new investors. The central method remains the same. Hook a few investors who are willing to get in early on a business venture. The details of the investment are never available, and so it doesn’t matter much. What entices people is the promise of multiple returns on investments.
After the first round of investors, they pay out some and use the rest to create a professional persona for themselves – set up an office and maybe buy some cars. This is just to scam the next round of investors.
Eventually, the second round of investors in the Ponzi scheme will need its payout. This is a simple matter of wash, rinse and repeat. The money from a newly recruited third round of investors can pay off the second round and deliver more returns to the first round.
Finally, as the Ponzi scheme becomes more successful, the complications also increase. So does the pressure on the schemer. Many investors will also be needing a payout, and they will need to be appeased with prompt returns. It now becomes a case of too many investors cashing out with very few investors coming in, and at this point, it starts to get ugly. The scheme will eventually become unsustainable, and the upside-down house of cards the scheme has built will finally collapse.
Why you should be careful about Ponzi schemes
- Only greedy people rush in – Do not allow yourself to be pressured into any form of investment. Take your time in making investment decisions. The more pressure you are in, the more suspicious you should get.
- Any investment with unrealistic returns should also be of significant concern. Investments are not money doubler machines. There are processes and element of risk with any form of investment.
- Steady investment returns – there is always an element of risk with any form of investment. So it is not government bonds, and someone is promising you a steady rate of return. Please investigate further. Make sure it’s not just a ploy for another Ponzi scheme.
- Finally, if you enter an investment, carefully examine what information the company provides. A suspicious lack of details should be a red flag.