I fell down a rabbit hole after doing the NYT mini crossword. I looked up Bernie Madoff and came across the wiki page for Ponzi schemes. I have heard the phrase used before…I think? But I keep reading the wikipedia description over and over and I just cannot understand how it works.
In: 5
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Me: Hi, I’m running a new investment firm. We pay 5% a month, that’s 60% a year!
You: Wow that’s great, I will put in $1000.
… 1 month later: Here’s your monthly 5% payment!
… 2 months later: Here’s your monthly 5% payment!
… 3 months later: I have disappeared with the rest of your money ha ha.
Me: Hi, I’m running a new investment firm. We pay 5% a month, that’s 60% a year!
You: Wow that’s great, I will put in $1000.
… 1 month later: Here’s your monthly 5% payment!
… 2 months later: Here’s your monthly 5% payment!
… 3 months later: I have disappeared with the rest of your money ha ha.
A Ponzi scheme is a scam where the person running the scheme basically promises to give really good returns on any money invested in their scheme but is really just using additional invested money to pay off previous investors.
An example:
I tell you that I am a stock market genius and can give you 10% returns on any money you give me in a week. So you give me $100. A week later I give you back $110 and you think this is awesome! I must really be a stock market genius. So you invest more money and tell your friends invest as well.
But it turns out I didn’t invest your money in anything. I just convinced other people to give me money under the same premise and I used that to give you your extra $10. But I have to pay those people off as well – fortunately for me, you and your friends are now willing to give me even more money! No problem, I can use your new money to pay off them too!
This is the core of the scheme. I don’t actually use the money to invest in the stock market like I’m telling you. I just use other investor’s money to pay you back. Eventually I run out of people that I can convince to give me more money. At this point the scheme very quickly collapses and I’m driving across the border with a briefcase of fraudulently gained cash.
A Ponzi scheme is a scam where the person running the scheme basically promises to give really good returns on any money invested in their scheme but is really just using additional invested money to pay off previous investors.
An example:
I tell you that I am a stock market genius and can give you 10% returns on any money you give me in a week. So you give me $100. A week later I give you back $110 and you think this is awesome! I must really be a stock market genius. So you invest more money and tell your friends invest as well.
But it turns out I didn’t invest your money in anything. I just convinced other people to give me money under the same premise and I used that to give you your extra $10. But I have to pay those people off as well – fortunately for me, you and your friends are now willing to give me even more money! No problem, I can use your new money to pay off them too!
This is the core of the scheme. I don’t actually use the money to invest in the stock market like I’m telling you. I just use other investor’s money to pay you back. Eventually I run out of people that I can convince to give me more money. At this point the scheme very quickly collapses and I’m driving across the border with a briefcase of fraudulently gained cash.
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