Only good people don’t need to get fame for their work. Sometimes clever criminals also get famed for their notorious work, and their evil deeds refer to their name. In history, Charles Ponzi is one of those.
This big scandal got famed all over the world in August 1920. Most people who are not familiar with financial education can ask what is a Ponzi scheme? or If forex trading is a Ponzi Scheme?
We are trying to explain it in simple words.
Forex itself is not a Ponzi scheme, but it exists in forex as an affiliate program. Forex Ponzi scheme is a fake investment scheme in which the scammer will pay out early investors, not from any recovery or acquisition, but the money of later investors.
The person who gets income is generally shown as profit from a legal transaction. All such schemes depend upon the constant flow of new money invested by newcomers to continue to give the return of older investors. The end of the scheme is it will collapse as new investors are not available and scammers run away with people’s money.
Forex Ponzi scheme
Forex Ponzi scheme is financial deception that advertises non-existing reserves that promise a very high level of profit in a very short period.
In the beginning, the cone representative demanded a very small investment to invest in and pay starting investor enough profit to give the impression that the scheme is very successful.
These investors are then asked to invite their friends and family members to invest in this fraud scheme. Once enough investors are involved and paid their capital, the fake representative of the scheme runs off with all the money.
History
Charles Ponzi, the founder of the Ponzi scheme, was a citizen of Italy. But lived most of his life in the United States. Charles Ponzi traps a huge amount of money. His original scheme was based on the legal arbitrage of the international reply coupons for the postage stamps.
Soon he changed his track and promised to give a handsome amount of money to his early investors and himself. His new scheme had large-scale coverage both in the USA and in the whole world.
Ponzi promised investors a 50% return in a few months and that was written on international coupons. He used reserves from new investors to pay ‘’bogus returns’’ to earlier investors. That spell soon vanished when it collapsed and this notoriously worked named after him as the Ponzi scheme.
He was imprisoned for 12 years and his last days were very miserable.
Similar schemes
1-Forex Trading Pyramid Scheme
These schemes force you into a multi-level pyramid trade scheme where instead of concentrating on the cause you joined, in this issue, trading forex, most of your time is spent compelling new investors into the company because you are incentivized by acquiring sharing commission under a pyramid network.
Forex is itself not the multilevel market, it is over a counter exchange market means dealing occurs between two parties. But some companies promise passive income by trading forex which is a multilevel market.
How Innocent People Were Caught In Ponzi Scheme
Though forex trading is legal and practiced almost in the whole world. It is difficult for a person to recognize that either he invested in forex trade or Ponzi scheme out of many schemes and investment programs investors did not understand in which type of business he was trapped in.
For your convenience, we share a letter from a forex software company employee. Let’s see
Am I Caught In a Forex Ponzi Scheme?
I work and have invested (a small amount) with a Forex Software company, this company gathers client funds and puts them into their trading portfolio, but does not personally manage the client funds.
I have learned that if the account were in drawdown (going to use example figures here) 50% of new investors would instantly be liable for that drawdown. Here’s a breakdown:
Let’s say the account was $10,000 and the drawdown was 50% ($5000). If I had invested $1000 I would be liable for $500 of that drawdown. Now, if a new investor came and deposited $5000, the account would be at $15,000 and the drawdown is afterward 33% of the account. The issue is, myself as an older investor, I am now only in a 33% drawdown of about ($333) and the new investor is instantly in a drawdown of 33% too.
To my mind, this means I am subsidized 17% as the new investor has technically paid off some of my debt, which to me looks just like how a Ponzi scheme works, albeit, an indirect Ponzi scheme.
Forex Trading Pyramid Scheme Instagram
The trader who posts on Instagram is not trustworthy. If someone asks about accreditation and capabilities to prove their expertise, they will never reply to you. Perhaps some of them are real and you can check them personally but that does not declare them legal.
The person who claims that he is a true broker but does not presently possess a website and no proof is not supposed to be the right person.
How can Instagram traders make money?
The main way through which an Instagram trader gets profit is by spreading speculation and CFD’’s. In finance CFD’’s stand for contract for difference is an agreement between seller and buyer, specifying that the buyer will pay to the seller the difference between the existing value of an asset and its worth at contract time.
The value of any provided trade is factored into two prices, the proposal (buy) and bid (sell) costs– so you’ll always buy a little more than the market price and sell below it.
2-Cryptocurrencies
A great and highly invested scam of this century is ‘’ICO’’ (initial coin offering). This has been taken as new generation Ponzi schemes. In Financial Times it is named as ‘’smart ponzis’’
These modern currencies lack regulatory transparency. So the variety of these monetary devices permits scammers vast freedom to design Ponzi schemes operating these investments. Also, the namelessness of cryptocurrency transactions can make it much more challenging to recognize and carry legal action (civil or criminal) against the culprit. The most common examples are Bitcoin and Ether
3-Economic Bubble
The Economic bubble is just similar to the Ponzi scheme in that different participants invest by contribution until it leads to collapse. A bubble shows ever-rising prices in an Open Market. This may be stock, housing, cryptocurrency.
In the past, tulip bulbs and Mississippi companies were good examples of economic bubbles. In these prices rise due to buyer bids. The reason behind the behavior of buyers was prices were rising tremendously at that time.
Bubbles are often said to depend on the ‘’greater fool theory’’. In finance, the greater fool theory indicates that one can make money through the purchase of overvalued things that price drastically exceed the intrinsic value-if that asset can later be sold at an even higher price.
As with the Ponzi scheme, the price exceeding the intrinsic value — if those acquisitions can later be resold at an even higher price.
The intrinsic value of anything depends on the current market value but ignores the chance of future fluctuation and the time worth of money.
Frequently Asked Questions
What is the difference between the economic bubble and the Ponzi scheme?
An economic bubble is a condition in which investors trade in products or assets for a larger price than their real value. There is no deception or cheating. On the other hand, a Ponzi scheme is a fake and fraud investment scheme with the promise that investment is risk-free with high returns
How does the Ponzi scheme fail?
Ponzi schemes often fail because there is no legal profit to maintain the process. It requires a regular flow of new investment from new investors. When the money from new investors slows down or if a large amount of cash is withdrawn, the scheme leads to failure.
Which one is the largest Ponzi scheme
In history, the largest Ponzi scheme was carried out by Bernard Lawrence Madoff. Born on April 29, 1938, died on April 14, 2021, was an American fraudster and financier who was the chairman of the NASDAQ stock exchange, worth of his Ponzi scheme was about $64.8 billion. In 2009 he was sentenced to 150 years in prison for this largest Ponzi scheme of history
What is a considerable pyramid scheme?
A pyramid scheme is an illegal investment or financial fraud based on a hierarchical setup that pays the early investor with the money from the new investor. The most famous pyramid scheme is the Ponzi scheme.
The Bottom Lines
Many government and nongovernment organizations introduce different schemes which try to produce safe investment methods. Not all but some are fraud and people lose their savings. Ponzi schemes are one of such big illegal schemes that affect thousands of people.
One of the best ways to avoid dipping into the trap of such a scheme is to identify the key detail. If you have to buy the inventory or you receive the better benefit for compelling new investors or distributors than marketing an actual product then understand that it might be a Ponzi scheme. Remain alert and read our article which help you to save from the loss of saving
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