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What Is a Ponzi Scheme? What Are The Ways to Avoid It?

What’s a Ponzi Scheme?

Ponzi Scheme is widespread investment fraud. It is a tricky scam and works on the manipulation of trust and promises. Investors are promised high returns with little to no risk. 

The organizers of the Ponzi Scheme will often urge you to invest your money to generate unbelievably high profits with insignificant risks. But they use money from the new investors to pay off the older investors instead of returning gains through profits. So, in the end, the new investors are used as scapegoats to make the old investors trust the promoter, making them invest some more. 

For example, a recent horrifying case of the Ponzi Scheme was the incident staged by Melissa Caddick in 2020. Melissa Caddick was an Australian woman who scammed around $30 million from investors, including further investments from their relatives and close friends. Instead of investing, she used all the money to live a luxurious life. While on the hideout from the police, she was assumed to have passed away under mysterious circumstances. 

However, the main point, in this case, is the fact that she preyed upon the trust of her relatives and close friends to extract money from them, comprising some investors who were robbed of their total savings. 

Hence, experts press on the fact that educating yourself about the red flags of the Ponzi Scheme and ways to avoid it will help you save money from getting in the hands of the wrong people. 

In this post, you will learn about the history of the Ponzi Scheme and ways to avoid it; that covers the Ponzi Scheme

  1. Signs to look out for
  2. Questions to ask yourself before investing 
  3. What experts recommend

History of the Ponzi Scheme

The scheme gained its name from Charles Ponzi, who scammed thousands of investors in 1919. He continued this till his arrest in 1920. 

In 1919, the postal services sold international reply coupons, allowing a sender to pre-purchase postage and integrate them into their correspondence. Later, the reply coupons were exchanged for airmail postage stamps. However, fluctuations in postage prices meant the stamps were more expensive in one country than in another. 

Ponzi played on this opportunity and indulged in legal trading in the beginning. However, Ponzi was soon filled with greed and started the scam, now known as the Ponzi Scheme. He urged people to invest for high-profit returns, even though he never invested the money. He executed this scheme under the disguise of his company, Securities Exchange Company. 

Some ways you can avoid it

1. Signs to look out for

Promises of high returns with little to no risk

In reality, no investment opportunity can give you guaranteed results. If someone comes to you with a deal that promises you high returns and no risks, it is most probably a too-good-to-be-true deal. There are risks in every investment, regardless of whether they are small or large investments. 

Consistent returns

There are constant fluctuations in the market. When you receive the same high returns on your investments regardless of the fluctuating market, it should be a matter of concern. 

Mysterious investment/company

A crucial point to protect yourself from scams is to avoid getting involved in investment strategies or processes that are too complex to understand. 

You should be offered as much transparency as possible from the company you plan to invest in. If you don’t have enough knowledge about the company and have difficulty accessing the same, it is better that you do not involve yourself with the company. 

Confirming the company’s registrations is always safe and checking whether they possess the necessary licenses to trade and invest. 

2. Questions to ask yourself before investing

  • Do I understand the risk involved in this kind of investment compared to the substantial return promised?
  • Do I fully understand the investment process enough to hand in my money to this company? 
  • Do I know the company well enough? Is the company verified and registered? Do I think I have enough information to invest in them? 
  • Do I know where I can go for help if something goes wrong with the investment scheme? 

Before you jump at the first opportunity to gain high returns, consider all the factors and understand the seriousness of the situation and your actions. Your decisions will reflect the consequences you face later on. 

When investing, be skeptical, be suspicious of overly promised offers, research the seller/company/advisor, and verify the legibility of the source you are supporting through. Another tell-tale sign that you have become a victim of the Ponzi Scheme is that there is no way of cashing out or receiving the promised returns. 

3. Here’s what the experts recommend: 

Fortunately, there are several ways to avoid becoming a victim of a Ponzi scheme. Some of these include:

1. Researching before investing

Carry out thorough and careful research into the company you’re planning to invest in. Please find out how long the person who approached you has been in the business themselves. Ponzi schemes are usually not registered by the government. They most probably involve firms that are unregistered or individuals that are unlicensed. Ask to see the registration. Reviewing information about the company’s finances, management, products, and services is essential to understand your investment entirely.

2. Be skeptical of your returns

Each investment you make carries a risk of some sort, whether high or low. Generally, there’s no guarantee when it comes to making investments. An investment giving higher returns usually involves higher risks. If your investment gives you positive returns at a regular interval despite average market conditions, this is a genuine reason for you to be suspicious. Asset values tend to fluctuate up and down, and if your investment provides steadily positive returns, there might be a problem.

3. Employ trusted financial advisors

Conduct research on the credentials of the scheme’s promoters. For example, review their past investment history and accreditation, and ensure they are certified by the financial board of your country to check their affiliation to the organization.

4. Be extra cautious if you are nearing retirement

Individuals who are nearing their retirement age are the most common targets of Ponzi schemes. Investors close to retirement might depend on the returns from the money they’ve invested, guiding them during their retiring years. As a result, they will be keen to invest more money, especially if the returns are promising.

5. Follow your instincts

Following your instincts might be the key to avoiding falling into the trap of a Ponzi scheme. Be suspicious of unsolicited offers. It may be a warning sign if someone invites you to invest in their organization out of the blue. Promoters of the scheme usually try to keep their relationship with investors casual and friendly and will try to make you feel comfortable enough to invest in their business. Their behavior is a sign to watch out for.

Summing up,

The bottom line is that it is essential to understand whom you are dealing with before investing any money. Exercise caution and make sure that the person is trustworthy. If anything seems suspicious, report it to the local authorities. After all, if it’s too good to be true, it probably is. You could also help more people from falling for the same scam by reporting it to the authorities. 

Be alert, educate yourself and trust your instincts.

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Disclaimer: The information in this article is provided for general education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. It is not intended to be and does not constitute financial, legal, tax or any other advice specific to you the user or anyone else. TurtleVerse does not guarantee the accuracy, completeness, or reliability of the information and shall not be held responsible for any action taken based on the published information.

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