There are many types of investment strategies you leverage if you’re thinking about making something useful with the money you currently keep in the bank. However, as in any other activity, becoming a successful investor often takes time and practice. While some investors are lucky to find and profit from a get-rich-quick scheme, for the rest, investing is a matter of trial and error. However, even as a novice investor, there are some investment strategies you’d better avoid if you want to keep your money safe and one of them is the pyramid scheme. Learn what this strategy is and why it is usually unsuccessful.
Ponzi or pyramid schemes are essentially one and the same thing. The Ponzi scheme bears this name because of its author – Charles Ponzi, a famous con artist in the US who managed to make $20 million back in the 1920s by luring people into an investment opportunity which was basically a pyramid scheme. Ponzi promised his clients a 50% profit in less than 3 months. Both the huge profit and the limited amount of time in which investors were made to believe they could achieve that return are nowadays, as much as they were back in the 20s, major red flags.
No one can really anticipate the market’s movements. Whether you invest in the traditional stock market or in a more innovative but also more volatile market such as that of crypto coins, you can never know for sure what factors will influence your investment. For this reason, trusting some broker or investor who tells you they can guarantee a 50% profit is not a very good idea, especially if they promise this in only 45 days like Charles Ponzi did with his clients.
Now, if you’re wondering what a Ponzi or a pyramid scheme actually is, you might have already encountered similar strategies, not necessarily in the field of investments. Pyramid schemes have also heavily been used in retail. At their core, these business or investment models are based on a large number of participants. The more people join the scheme, the better, at least for those who launched it or were among the first who joined it.
A pyramid scheme is a system in which every newcomer needs to contribute. In investments, this contribution means money. In other areas, for example in retail new joiners can contribute by promoting or selling the company’s products for free. No matter the field where it’s applied, the scheme works similarly. New joiners invest their money or time, and the initial investors leverage their contributions.
In the Ponzi scheme, everyone was promised the same high profits. However, the first investors were the only ones who got paid. They were basically paid from the money provided by the new investors. Paying some of the investors who join a pyramid scheme, especially one that is masterminded as a scam, like Ponzi’s scheme, is essential because this boosts trust and hope. Since most people who enter pyramid schemes get there through referrals from friends or relatives, it’s important to offer an example of success and maintain the illusion that everyone will make profit in the end.
However, whether we’re talking about pure scams or pyramid schemes implemented by legit companies, the final result is the same – only those who are at the top of the pyramid earn money, while the rest are simply lured to continue supporting the pyramid with promises of high returns or few incentives such as free products or discounts.
The difference between a pyramid scheme and a Ponzi scheme is that the first one is theoretically legitimate, and the founders only need to bring new members aboard to keep the business afloat. A Ponzi scheme is a scam whose sole purpose is to defraud people. However, both strategies are ultimately doomed to fail as people one day get tired of empty promises and stop investing time or money in the scheme. When this happens, the funds get drained, and the system will collapse.
It is only a matter of time before this happens. If you want to avoid losing time, money, or both, it’s always better to simply say no to pyramid schemes. All rights reserved to Stratford Management Japan