Ponzi scheme vs pyramid scheme: Which one is a better option?

When you work day and night to earn sufficient money that would be enough to cope with the needs and wants for your family’s current and future needs, then you wish to keep it secured.

Plus, for future savings many times you want to invest so your future will be protected if you need instant money. But when you invest your hard-earned money, you need to be careful. Scam, fraud schemes, con artists, and fraudsters are indeed a reality that can’t be identified easily.

A difference between common rip-offs that you should know about is the Ponzi scheme vs pyramid scheme. What are they specifically and why they are mentioned today to keep you aware of them? Keep reading to find out.

Ponzi scheme vs pyramid scheme

Ponzi Scheme

A Ponzi scheme is a deceitful investment in which the operator offers returns on the total investment to the investor from the capital derived from the investment of the new investor rather than the investment of the investor directly.

Operators of the Ponzi schemes entice the investors to invest in large short-term rates from the profit.

A fraudulent operator of the investment makes a profit by charging a total fee on the entire investment or just by fleeing with the whole investment. Generally, the Ponzi schemes collapse when enough capital gets piled up to pay to a large number of investors.

The Ponzi scheme is named after the Charles Ponzi of Boston, Massachusetts. This is because Ponzi launched an investment scheme in the 1920s, that guarantees a 50% return on the investment to every investor. The investors have to invest in the postal coupons. However, the scheme was dissolved when Charles went unable to pay the investors. 

Examples of Ponzi Schemes

• JSG Capital Investments: two California individuals who said they will provide high returns on the investments via “hot’ pre-IPO stocks. For any kind of investment was made by the investors ever.
• Bernie Madoff: A broker’s Wealth management business was actually based on the Ponzi schemes for twenty years that deceit the investors for billions. Madoff’s scheme was exposed by Harry Markopoulos.

Pyramid Scheme

The scheme is also referred to as a chain referral scheme, is a business model that was fraudulent where the new members are promised to be given payments when they convince and enroll investors further in the scheme. By the time the membership of the investors expands, further recruiting for investors becomes difficult. Simultaneously, the revenue paid to the previous investors becomes unstable and the business crashes due to the same.

Oftentimes, the pyramid scheme appears to be the MLM – multi-level marketing practice. These kinds of Pyramid schemes also seem to be legitimate that use the profit from the sale and provide bonuses to the recruiters. Although, it just appears to be legitimate but involves no legal sales. The investors are paid from the recruitment of new enrollees and the new ones were promised for the incoming funds.

Examples of the Pyramid schemes

• Give and Take: A scheme where payment of £3000 was asked by a group of operators as entry fees and a bonus of £20,000 was promised after recruiting a specified number of new members. After a long trial, six individuals were convicted and served prison time for running the scheme illegally.
• Burn Lounge: Burn lounge lured the individuals as an online music store who paid and bought the rights to sell music while they will be rewarded by recruiting further individuals to the business. However, the sales were not linked to any sales or business. On trial filed by FTC, the lounge was awarded a $17 million judgment.

Difference between Ponzi and Pyramid schemes

The main difference between the Ponzi schemes and the Pyramid schemes is the type of investment and rewards investors get.

The Ponzi scheme asks for the investments in something from the individual with the later date profit where the pyramid scheme offers profit by recruiting more people into the scheme. The CFTC and SEC took action against the traitors of Ponzi and pyramid schemes and rewarded the whistleblowers who helped in identifying the frauds and traitors.

Fraud schemes like a pyramid do not last because they depend on recruitment and involving other members in the scheme. Since there are specific numbers of people who have interests in investing with a specified level of investment, it becomes impossible to recruit new members that eventually lead the scheme to collapse. The people who always make money till the end of the scheme are the members who remain at the top.

As for the MLM, these marketing companies works for a long time. As marketing companies work in providing solid services and products, recruiting new members and additional investors is also an essential part of multi-level marketing companies.

How can you avoid being scammed by these fraudulent schemes?

The only way to avoid being scammed by any fraudulent scheme is not to get involved in any of the schemes that you doubt. If you really wish to invest and get real profit, then it is better to gather information about the companies, people involved, and get everything in return so you can claim the loss you may bear in the future.

The best practice would be to involve any legal personality like an attorney who might help you get the information you need and make documents before you make the investments.