Can you cash in on Ponzi schemes?

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Ponzi schemes quite rightly terrify us all. With high profile scams leaving thousands of unwary investors thousands or even millions of pounds out of pocket, we realise they are risky and criminal schemes that must be avoided at all costs.

However, a new research paper from the US reveals there's a small minority who do exactly the opposite.
It has reported that a number of high-risk investors are seeing these scams as an opportunity.

Ponzi schemes

Ponzi schemes are pyramid selling scams. The person setting the scheme up gets a handful of people to invest, and pays themselves massive returns from the first round of investment. This first round of investors then go out to find a second round of investors - and their money is used to pay the people recruited in the first round.

The second round of investors then recruit a third to pay them, and so on. The scheme continues until the number of available new investors isn't enough to pay the previous round, and then the whole thing collapses like a massive and ruinous house of cards.

There are huge numbers of people sucked into these schemes, convinced by stories from investors who have received large payouts in the early days of the scheme, and when things go wrong they often lose everything.


However, the report claims that there are also a number of people who are well aware they are buying into a Ponzi scheme, and understand the risks, they just think they can beat the system.

A study by computer scientists Dr Richard Clayton, Jie Han and Tyler Moore from the Wellesley College in the US, monitored 1,600 of these schemes run through websites (known as High Yield Investment Programmes) for nine months, during which time around £4 million a month passed through the schemes.

They said : "We call them 'postmodern' Ponzi schemes because we believe that many of the investors are well aware of the fraudulent nature of the sites, but believe that by investing at an early stage – and withdrawing their money before the scheme's collapse – they will be able to make a profit at the expense of less savvy investors."


This study identified 'tracker' sites, which were monitoring the progress of the schemes, highlighting what they were paying out at any given time, and their likelihood of imminent collapse, to help investors spot schemes at an early stage, and then identify the time to cash out - so they benefit from the growing scheme and avoid the collapse.


However, while it concluded some people may be making money from using these tools, the experts warn that the risks are simply too high. The Financial Services Authority emphasises: "We strongly advise you to only invest money with financial services firms that are authorised by us: check our Register to ensure they are. You can also see on our Register whether an individual has been approved by us."

It says schemes offering unrealistic returns should set serious alarm bells ringing, and that consumers should: "be careful when an opportunity to invest your money requires you to bring in subsequent investors to increase your profit – and be especially wary if you are told you can earn more from introducing investors than from the return on investment."
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