Ponzi scheme

A Ponzi scheme is named after Charles Ponzi, who ran a famous version in the 1920s, though the model predates him. The operator promises consistently high, low-risk returns. Early investors receive payments — funded not by real investment activity but by capital from new recruits. This creates a convincing track record.

The scheme requires a continuously growing pool of new investors to service the growing obligations to existing ones. When recruitment slows, the operator can no longer meet withdrawal requests, and the scheme collapses. In many cases the operator withdraws what is left and disappears.

Ponzi schemes can operate for years or even decades if they keep attracting new money. The 2008 financial crisis triggered the collapse of the largest known Ponzi scheme, run by Bernard Madoff, with losses exceeding $17 billion.