What is a ponzi scheme?
Dave, a friend of mine listened politely to my explanation of how a multi-tiered marketing system I've signed up for works, then told me rather bluntly that it was a ponzi scheme and that I was being ripped off. I didn't really understand, though it was clearly some sort of scam or another. What is a ponzi scheme?
That's a great question, and I would definitely say that if you're not completely sure how this new multi-level or multi-tier system works, then your friend might well be right that it is too good to be true, aka a scam or rip-off. But let's start at the beginning.
A Ponzi scheme, named after New England resident Charles Ponzi (from the 1920s), is one where each round of investments is used to pay off or offer dividends to previous investors. For example, let's say that I invested $1000 in the scheme -- the original was related to postage stamps -- and a month later you invested the same amount. Charles would take $250 of your money and pay me a dividend, promising me even more as the system took off. The other $750 he'd pocket, with no actual product, property or product being built or sold.
If you think this through, ponzi schemes only work as long as there are new investors you can bring on board. Run out of those and suddenly the huge percentage of revenue skimmed off the top by the parent company or individual can't be hidden and everything falls apart. And, in many cases, the criminal goes to jail.
MLM'ers talk about an "ever-growing downline" in the same terms sometimes and their schemes can be just as convoluted. For example, perhaps there's a nutritional supplement that they sell, one that costs $50/bottle but actually has $40/bottle profit. Now the person selling it keeps $10, sending $40 to the network. Half of the $40 goes to the parent corporation for expenses and profit (50% profit, not bad) and the remaining $20 is split to the "up chain" or representatives who got that salesperson into the loop originally. Perhaps it's $10, $5, $5, to be three levels.In that case, it's not technically illegal, you're just selling something for 2.5x its actual value to fund the sales infrastructure, but just as Charles initially purchased international mail coupons for his investors before he realized that there was no need to have an actual product, some of these MLM schemes collapse upon themselves.
Of course, there are also bigger, more well-known financiers that have created elaborate ponzi schemes too, notably Bernie Madoff. As the US Securities and Exchange Commission explains it:
"Madoff.... orchestrated a multi-billion dollar Ponzi scheme that swindled money from thousands of investors. Unlike the promoters of many Ponzi schemes, Madoff did not promise spectacular short-term investment returns. Instead, his investors' phony account statements showed moderate, but consistently positive returns -- even during turbulent market conditions."
Note also that pyramid schemes are very similar to ponzi schemes, and are often characterized by programs where you have the promise of earning big profits by making an initial payment then recruiting other distributors or a "downline" of the product or service. It typically doesn't actually have anything to sell, it's just the structure itself - and those initial payments - that ends up being important. Eventually it too collapses on itself.
The long and short of it? Be careful out there and definitely do look a gift horse in the mouth. If they're promising something that seems impossible, if it's too darn good to be true, your best bet is to move along to a more realistic - and legal - investment. And good luck out there, it's a jungle!
More Useful d) None of the Above Articles:
✔ What's the most popular Halloween candy?
It's Halloween, All Hallow's Eve, and in the United States, at least, that means it's time for a strange custom that children throughout...✔ Review: Sony NEX-5N Digital Camera
This is a guest post by professional photographer Paul M. Bowers... I was born and raised in the briar patch of commercial photography-...✔ How do other countries celebrate Independence Day?
Hello Mr. Taylor. The other kids in my class say that every country celebrates Independence Day on July 4th and that it's a...✔ What is a ponzi scheme?
Dave, a friend of mine listened politely to my explanation of how a multi-tiered marketing system I've signed up for works, then told...✔ Update firmware on my Panasonic Blu-Ray DVD player?
I have a Panasonic DMP-BDT320 blu-ray DVD player and it's starting to report that I need a 'firmware' update or upgrade. I have...
Let's stay in touch!
Sign up for my weekly AskDaveTaylor Newsletter and you'll receive even more tech and gadget help right to your inbox, along with exclusive news and industry updates. It's good stuff. I promise!
I do have a comment, now that you mention it!
Check This Out Too...
Look for Answers
All Our Categories
Apple iPad Help
Articles and Reviews
Auctions and Online Shopping
Blogs and Blogging
Building Web Site Traffic
Business and Management
Computer and Internet Basics
d) None of the Above
Google Gmail Help
Google Plus Help
Industry News and Trade Shows
iPhone and Cell Phone Help
iPod, Sony PSP and MP3 Player Help
Kindle Fire Help
Mac OS X Help
Pay Per Click (PPC) Advertising
Search Engine Optimization (SEO)
Shell Script Programming
Tech Support Video Help
The Writing Business
Twitter, LinkedIn and Social Network Help
Unix and Linux Help
Video Game Tips and Help
Windows PC Help
Find Me on Google+
ADT on G+