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How many times do we come across messages or advertisements that promise to make our savings yield exorbitant returns? Promises of easy, fast and risk-free earnings. Often it’s about scams based on a very precise scheme that dates back over 100 years: lo Ponzi schemea scam in which the victim thinks he is investing, but in reality he is paid with the money of other investors, who in turn are paid with the money of other investors and so on until the castle breaks and whoever “invested” loses everything. It is named after Charles Ponziwho made this mechanism famous with his own scam, despite not having invented it. But how exactly does it work and, above all, how can we recognize it to protect our savings?
What is the Ponzi scheme and the story of the man who gave the scam its name
The Ponzi scheme it is a fraudulent economic sales model that promises strong profits to victims, as long as they recruit new “investors”. Although not the first to use it, this scheme is named after Charles Ponzian Italian immigrant to the United States who in 1920 became infamous for a colossal scam.
Ponzi exploited the mechanism of International Response Coupons, coupon that could be exchanged for stamps in several countries. Noting that he could buy them in Italy low cost (due to the valuation of the lira) and resell them in the USA for a higher pricecreated a seemingly legitimate business.
He began promising returns of 50% in 45 days. Thousands of people entrusted him with their savings, for a total of approximately 15 million dollars at the time (equivalent to almost 200 million today). In reality, i logistics costs made the stamp business unprofitable, but Ponzi continued to pay early investors with i money from newcomersuntil financial analyst Clarence Barron revealed the trick, leading to the collapse of the system and his arrest.
How the Ponzi Scheme works: an example
The mechanism behind this scam is, in its essence, rather simple. The scammer shows up with aapparently revolutionary ideapromising returns far above the market average and, more importantly (and suspiciously), at zero risk.
Let’s imagine that an investment is proposed with a return of 10% monthly. A victim decides to invest 1,000 euros. Punctually, after a month, he receives it 100 euro profit. Convinced of the goodness of the system, she could not only reinvest, but also spread the word between friends and relatives, unintentionally becoming an accomplice of the system.
The problem is that these investments do not exist. The 100 euros received by the victim are not the result of real economic activity, but simply come from the money paid by other investors arrived after her. In practice, you pay those who are inside with the money of those who enter.
This creates a chain which only holds as long as there is a constant and growing influx of new investors. The scammer uses the new capital to pay the “old” investors (and to pocket a portion), but as soon as the flow of money stops or too many people ask to withdraw their money at the same time, theentire castle collapsesleaving most of the participants in the lurch.
How to recognize the scam and how the investor can defend himself
Today, with the web and social media, financial scams travel fast. Here are some warning signs not to be underestimated:
- High earnings and without risks: in finance, any investment carries with it risks, and above all the higher the possible return, the riskier an investment is.
- Constant returns: Markets fluctuate. An investment that guarantees fixed and always positive returnsregardless of the performance of the economy, is suspect.
- Sense of urgency: be wary of those who place you rushsaying that it is a unique opportunity to be seized immediately.
- Request to recruit others: if the profit depends on bringing in other people, we are faced with one pyramid scheme.
- Lack of transparency: If it’s not clear how profits are generated or where the money goes, it’s best to stay away.
The golden rule is always the same: If an offer seems too good to be true, it’s probably not real. To invest safely, it is always better to rely on authorized financial operators and consultants and registered, for example, in the Register of Financial Advisors.
