A ponzi scheme is a type of investment scam. It is named after Charles Ponzi, who initiated the first ponzi scheme in the 1920s. A ponzi scheme works by having investors invest in what appears to be a legitimate investment opportunity. The scammer promises high returns. As investor money comes in, the scammer uses the investors’ own money to pay for the returns. Because investors are receiving regular payments, they don’t question the legitimacy of the operation. Behind the scenes, the scammer is pocketing/stealing most of the money. Once new investors stop coming into the scheme, the scammer can no longer pay returns to existing investors. At that point, the entire scheme collapses. Most scammers will try to disappear when they see that new investors are not available and they are running out of money to pay returns. Sometimes authorities find out about the ponzi scheme before it collapses. In many cases, though, investors lose out.
