We all have heard many times about the Ponzi scheme. It is a well known scam method that is capable to make people rich very fast. However the faster wealth is gained the closer a schemer approach to a jail. In this article I’ll try to illustrate on a sample model how Ponzi scheme really works and can make lots of money out of nothing.

Let’s imagine that we have decided to start a Ponzi scheme with no initial investment in hand. The starting point for us would be the advertisement of some attractive offer, for example:

“We pay 20% per month on the amount you invested with us! All investors may take out monthly interest at the end of each month and withdraw a principal at the year-end!”

Let’s now assume that this advertisement had some effect and during the first month (January) we have attracted 2 investors with the following amounts invested by each:

Investor A         150      

Investor B         200      

Total                350      

At the end of January we should fulfill our obligations to pay an interest:

                                                           Jan      

Investor A         150       x 20%               -30

Investor B         200       x 20%               -40

Total                 350                              -70

Resulting balance at the end of month would be: 350 - 70 = 280 USD

Assuming that initial advertisement together with the prompt payment to existing investors will have some marketing effect let’s assume that at the end of February we have already got 4 investors:

                                                           Jan       Feb

Investor A         150       x 20%               -30       -30

Investor B         200       x 20%               -40       -40

Investor C         160       x 20%               0          -32

Investor D         120       x 20%               0          -24

Total                630                              -70       -126

Balance           434

This month’s result is 434 USD indicating the overall increase of possessed cash by 154 USD.

Keeping this fast growing trend further we may expect following investors and figures in March:

                                                           Jan       Feb       Mar

Investor A         150       x 20%               -30       -30       -30

Investor B         200       x 20%               -40       -40       -40

Investor C         160       x 20%               0          -32       -32

Investor D         120       x 20%               0          -24       -24

Investor E         140       x 20%               0          0          -28

Investor F         170       x 20%               0          0          -34

Total                940                              -70       -126     -188

Balance           556

This time the outstanding balance has increased by 122 USD in respect to the previous month.

This is pretty much of what can be called the core of the Ponzi scheme. The main point is that constant inflow of new investors could be sufficient to pay existing obligations and to increase remaining funds on the account of the schemer. In this sample we were adding up 2 new investors every month with approximately same amounts. Even if we assume that finding 2 new customers per month is pretty realistic this trend would be favorable to the schemer only for several months. After 3-4 months the scheme will reach the point when monthly payment of interest exceed the cash inflow from newly coming investors. This would be the peak of the scheme and the best moment to withdraw from running it.

Theoretically to sustain ever running Ponzi scheme it is necessary to increase incoming investments from month to month by geometric progression. That’s surely impossible to do since every market, country and even the world in a whole has a finite number of potential investors.