Why Do Ponzi Schemes Collapse?

Ponzi schemes collapse because, by definition, these schemes are fraudulent ventures used to lure money of investors with no operational profit-making businesses in place. The purpose of the Ponzi scheme is that the person initiating it would pocket sums of investment money and would keep on lying about the returns until the scam is exposed for one reason or another. Ponzi schemes are frauds in plain and simple words and are meant to steal money from people who are hoping to earn money in the name of investment.

The theory and practice of Ponzi schemes have been around for a long time, but they earn their name from Charles Ponzi, who was the first culprit to earn a significant amount of money to earn prominence. Ponzi was an Italian immigrant to the United States who earned millions of dollars purporting to sell International Reply Coupons. He ended up selling 160 million International Reply Coupons, the actual number in existence of which was 27,000 around the world.

This was neither the first Ponzi scheme, and not by any means the last. Conmen who introduce Ponzi schemes are masters of adapting and modifying them as per the changing situation, especially controlled by their own financial condition and manipulating the naivety of the buyers. Other prominent Ponzi schemers include Bernard Madoff and Texan banker Allen Stanford among many other. What all these Ponzi scheme conmen have in common is that the are selling nothing for money, by lying about it and luring buyers by promising unrealistic returns which never get to them, apart from little amounts used to cover the lie. Often Ponzi schemers use their reputation in the market for the investors to trust them blindly.

Ponzi schemes should not be confused with pyramid schemes in which the buyers become sellers and recruit further people to sell, whether a product is involved or not. In a Ponzi scheme, a single seller cons several buyers by simply lying about the returns. Pyramid schemes, in contrast, collapse for different reasons, that is, not enough subscribers are found which would be required to return the profit to the lowest level of subscribers.