How a ponzi scheme works

A ponzi scheme is an investment scam that promises investors a higher rate of return relative to current market average with minimal risk. This requires an ample supply of new investors that will power the system. It works by taking the money of an initial investor and pretend that it will be invested on low risk but high yielding investment instruments. In reality the funds recieved by the manager will go to his personal account. In order to pay the initial investor upon demand, the manager would have to look for new investors and use their capital to pay the initial investor. As long as there is a constant flow of new investors, the ponzi scheme would work perfectly. It would only slow down during an economic slowdown when investors are weary on investing. This would limit the capital available to sustain the initial investors when they demanded their money back. As a result the ponzi scheme would fail.

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