What is a ponzi scheme, you ask? The basic definition of a ponzi scheme is a fraudulent investment operation that involves paying very high returns to investors out of the money paid in by other new investors, rather than out of the profits from a real business. It is named after Charles Ponzi who conned thousands of people into investing in a scheme he dreamed up back in the 1920s.

What is the difference between a ponzi scheme and a pyramid scheme?

Ponzi schemes have many similarities to pyramid schemes and many people use the terms interchangeably. Just like a ponzi scheme, a pyramid scheme is a form of fraud relying on false financial information, including the promise of an extremely high rate of return, but they do have some differences…

In a ponzi scheme, the scam artist acts as “base” for the victims, interacting with all of them directly. In a pyramid scheme, those who recruit additional participants benefit directly and failure to recruit usually means they make no money and get no other real benefits.

A Ponzi scheme claims to rely on some hidden, restricted, or insider investment approach and often attracts investors who have money to spend. Pyramid schemes are open to the fact that money from new recruits will be the source of payout for the initial investors.

A pyramid scheme will typically collapse much faster because of the necessity of exponential increases in participants to sustain it. However, ponzi schemes can survive a long time simply by persuading most existing participants to reinvest their money, so a relatively small number of new participants are needed.

Needless to say, you want to stay away from both ponzi schemes and pyramid schemes. It’s easy to get sucked in to the promise of huge returns and fast money, but most people end up losing a lot of money and everyone loses in the end. A real business will give you a quality product or service for your money so you are getting something even without bringing in more people.

There are plenty of real and legitimate internet businesses you can join to make money online so don’t get caught up in a ponzi scheme or pyramid scheme. Do some research before giving your money to any business and you might save yourself a lot of headaches in the end.