How do Ponzi Schemes, Chain Letters and Pyramid Schemes Operate?
The essence of the Ponzi scheme was that Ponzi used the money he received from later investors to pay extravagant rates of return to early investors, thereby inducing more investors to place their money with him in the false hope of realizing this same extravagant rate of return themselves. This works only so long as there is an ever-increasing number of new investors coming into the scheme. To pay a 100% profit to the first 1,000 investors you need the money from 2,000 new investors. To pay the same return to these first 3,000 investors in the next round, you need the money from 6,000 new investors. If all the investors stay in the scheme, then you will need 18,000 new investors to pay off the first 9,000 investors. In fact, if all the investors stay in the scheme, the number of investors participating has to triple with every round of investments. In Ponzi’s scheme, starting with only 1,000 investors, after the 15th round the number of investors would exceed the population of the ear
