Ponzi Schemes vs. Pyramid Schemes
There are a myriad different ways to get money through scheming and scamming. Two of the oldest and most well-known forms of illegal set ups are pyramid schemes and Ponzi schemes. “Pyramid scheme” tends to refer to any kind of monetarily based scam, and Ponzi scheme tends to be synonymous with pyramid. However, they’re actually two very different forms of illegal marketing. Here’s a look at the difference in a Ponzi scheme versus a pyramid scheme.
What is a Ponzi Scheme?
Ponzi schemes were named for their creator: Charles Ponzi. Ponzi was a businessman in the early 1900s who got a bunch of people to buy into a postage stamp scheme. He paid off his old debts with the money he got from new “investors.”
A Ponzi scheme is a type of investment fraud in which the scammer promises targets a chance to invest, often claiming there is little risk involved or a high interest return. As more people begin to buy in the money is used to pay the first people who invested so they are under the impression whatever product or stock they’ve invested in is prospering. In turn, this convinces earlier investors to pour more money into the fake business.
To work well, the scammer has to continue getting more and more people to buy in, so that he can keep paying a portion of that money on to other investors. It can take awhile for Ponzi schemes to fall apart if this goes well, because the money tends to continue circulating.
For example, you get 5 people to invest $10,000 a piece, promising they’ll earn interest quickly. The next 5 people that invest unknowingly contribute $1,000 of their $10,000 investment to the initial 5 people, making it look like everything is going like it should. Then instead of taking their $1,000 reward, they decide to buy $1,000 more into your shell company. And just like that, you’ve made $100,000 for nothing. Ponzi made about $15 million, but he also spent time in prison for fraud and was deported.
What is a Pyramid Scheme?
A pyramid scheme works a little differently. It can start with one person. This person finds 10 people to buy into their scheme, whether it’s to donate to a fake charity or to buy a box full of crappy, overpriced cleaning product made mostly out of water. Each of those 10 people have to find 10 more people to join, and so on and so on.
You may have a product to sell, but it really doesn’t matter. How you really make money is by getting other people to join—with a buy in fee, of course. Yet, there are a finite number of people who can be talked into the pyramid. Even if you were to include the whole world, you’d run out pretty quickly, and the whole world isn’t going to fall for your pyramid scheme.
What’s the Difference?
The key difference between a Ponzi scheme and a pyramid scheme is the structure. Pyramid schemes are (obviously) a pyramid in which everyone interacts and the money funnels upward. Ponzi schemes are run by a single person who comes in contact with all of the investors, while the investors have no contact with each other. The bottom end of the pyramid may never meet the person who started it all. Ultimately, they’re both scams and they’re both illegal, so stay as far away from them as you can.