What is Ponzi Scheme? History & How to Identify Them

ponzi scheme

Ponzi schemes are foul investment schemes promise to provide high returns with zero or little risk.

Like pyramid schemes, Ponzi schemes also perform money-circulation. These schemes use money of new investors to provide high commission to old investors which attract more investors.

Ponzi scheme companies use different mediums to lure and fools investors. Sometimes claim to invest investors’ money into real estate business and generate high returns or Behave like a bank and promise high returns on a very short maturity period.

Ponzi Schemes and Pyramid schemes are considered fraud in almost all countries. But still, illegally operate, and many people get scammed due to greediness and lack of knowledge.


Various Ponzi scheme scams were held in the 19th century, it got popularized in the early 1920s when Italy born Charles Ponzi made a $20 million scam in USA.

Considering inflation, in 2020 that scam is of $250 Million. The name Ponzi Scheme is given on Charles Ponzi.

Biggest Ponzi Scam

Bernie Madoff has done the biggest Ponzi scheme scam of 64.8 Billion. Madoff was a reputed American financier and he was operating an investment firm.

He helped Nasdaq for launching first electronic stock exchange and even served as the chairman for a time.

For more than 17 years, Madoff scammed everyone from poor to rich. In 2008, The Bernie Madoff Scam got revealed.

In March 2019 Madoff sentenced to jail for 150 years and he said “deeply sorry and ashamed“.

It was the biggest failure of USA regulators and SEC, they were unable to catch such a massive scam for years.

Bernie Madoff died at the age of 81 on 14, April 2021.

Different from Pyramid Scheme

Ponzi Schemes and Pyramid Schemes both circulate money where initial investors get commission from new investors’ money.

But basic differences arise with the structure. Pyramid schemes often operate like an MLM AKA Direct Selling Company.

Pyramid Scheme encourages their members to recruit more members while every member needs to pay a certain amount to join the company.

Pyramid scheme company decide a rigid compensation plan, on that basis member are structured and commission is allocated. With new recruitments, pyramid schemes spread exponentially.

Pyramid schemes are now advanced, they pretend like an MLM Company. Using dummy products make difficult to differentiate between pyramid scheme and MLM.

On the other hand, in Ponzi schemes recruitment is not required and there is no rigid compensation plan like a pyramid scheme company.

Ponzi scheme company act like an investment firm where the company itself try to lure investors.

How to identify a Ponzi Schemes

There are few red flags, which can help to identify a Ponzi scheme.

High Return with Zero Risk

It is the main attribute of ponzi schemes. They promise to give high returns with zero or no risk. Initial investors actually get high returns.

Vague Business Model

Ponzi scheme company baffles investors and does not provide complete information. Companies not share, how they are providing high returns, and where investors’ money is going.

Required Continuous Investment

Ponzi schemes require a continuous flow of money, so they always try to capture more and more investors.

They will convince early investors to reinvest or sometimes offer installment options to get money from investors on regular basis.


Ponzi scheme company try all possible ways to bring more investors. For a time they will try all possible ways to market themselves, even hire local agents or media ads for promotion

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