Ponzi Schemes vs Pyramid Schemes: . . . Learn Them to Recognize It In The MLM Industry

Most don’t know the difference between Ponzi schemes vs Pyramid schemes.  A Ponzi Scheme is similar to a Pyramid Scheme. However, Ponzi schemes have professional investors that are investing in the market with the expectation to get some interest.

The life of the Pyramid scheme is dependent on not running out of people to give money to it

The life of the Ponzi scheme is dependent on not running out of investors to help pay other peoples high returns.

Ponzi Schemes vs Pyramid Schemes

Ponzi schemes are deceptive investment services managed by a person posing as a stockbroker or manager.  Investors give money to the person who is managing their portfolio who will promise them a high return.  When the investor wants their money returned to them they're paid with the money from future investors instead of business activities.


Ponzi Schemes vs Pyramid Schemes - Ponzi Scheme

In a Pyramid scheme, the person who starts the pyramid recruits members to pay a certain dollar amount. Those members have the understanding that they have to recruit more members to pay the same dollar amounts.

Every time the members pay the dollar amounts they have to give a percentage to the person that recruited them.  In addition, the person that is doing the recruiting is getting paid a percentage from the people they recruit also.


Ponzi Schemes vs Pyramid Schemes - Pyramid Scheme

People more knowledgeable about Pyramid schemes sometimes go along with it because they try to make as much money as possible before it collapses. In the Ponzi scheme, the only one who knows it is a scam is the person who is managing it.  This is because the investors actually believe that they are investing in the market.


How They Collapse

Ponzi schemes could pose as corporations, companies or individuals who attract investors with a specific strategy.

They offer unusually high returns in a short period of time ( such as HYIP's).  In order to continue to provide these high returns in a short period of time, this scheme would have to keep on acquiring new investors.

That is why the creators of these Ponzi schemes focus all of their energy to attract investors with a considerable amount of income. However, when the creator of the Ponzi scheme is no longer able to maintain the amount of interest that is needed, the scheme usually collapses. It collapses when the investors start wanting to draw their money back when there isn't enough to pay everybody.

Reasons why they collapse and are exposed (for reasons other than and being shut down by authority figures) are:

  • When the market scare such as the one in 2008 happens and all investors want to pull their money out at the same time (obviously it won't be enough to pay everybody their money back)
  • The person managing the Ponzi scheme decides they have enough money and disappears with no trace
  • When the time comes for various investors to be paid their high returns as promised. There may be problems paying those high returns depending on how much is in relation to the number of investors coming in

What Pyramid schemes and Ponzi schemes have in common is they both depend on money from new members or investors.

  • The life of the Pyramid scheme is dependent on not running out of people to give money to it
  • The life of the Ponzi scheme is dependent on not running out of investors to help pay other peoples high returns.


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