Often in the sub we see scams labelled as "ponzi schemes". Many believe it's the general term that can be dropped any time that a creator is running away with the funds of investors.

But a ponzi scheme has a specific meaning. It refers to a specific type of scam.

Returns to investors are paid for from money taken from new investors. The company does not have any other business model to support the payment of these returns.

Many will understand this already, but I know that many in this sub also don't. So take a seat by the fire as Mr_Bob_Ferguson breaks down a ponzi.

Let's look at a scenario.

Month 1

• Person 1 invests $100 into company with the promise of an unsustainable 10% per month return.
• The company now have $100.
• Company pays the promised return to Person 1 ($10).
• The company now have $90.

Month 2

• Person 1 is happy with their amazing 10% return. They start telling their friends.
• Person 2 and 3 also invest $100 each into the company.
• The company now have $290.
• Company pays the promised return to the 3 investors ($30).
• The company now have $260.

Month 3

• Person 1, 2 and 3 are all amazed. They each find 2 new friends, bringing in 6 new investors.
• 6 new investors invest $100 each into the company.
• The company now have $860.
• Company pays the promised return to the 9 investors ($90).
• The company now have $770.

...and the cycle just continues. Bring in new investors, give everyone some money and keep them happy.

Where it goes wrong

• At this point the company need to pay out $90 each and every month. The $770 in their bank account will last them 8.5 months.
• If any investors decide to leave the fund then they will need to be paid out, else they will trigger red flags with other investors.
• Every investor who leaves, and takes their $100 with them, shortens that 8.5 months burn time.

To last beyond 8.5 months they must bring in new investors, so that they can use those funds to pay the existing investors.

In crypto we see plenty of scams.

Let's see if we can start labelling them correctly.