The truth behind investment traps: How Ponzi schemes gradually swallow hard-earned money

Every year, tens of thousands of investors fall into Ponzi schemes, from personal savings to pensions. These scams lure victims with tempting high returns, ultimately leaving them with nothing. Today, we dissect the tricks behind such financial frauds to help you see through the disguise.

Shocking Scam Numbers

In the history of financial fraud, there are several cases whose scale is jaw-dropping.

$64.8 billion Wall Street scandal

In 2009, former NASDAQ chairman Bernard Madoff was sentenced to 150 years in prison for the largest investment fraud in history. This 20-year-long scam was exposed during the 2008 financial crisis when investors rushed to withdraw their funds—about $7 billion in redemption requests instantly collapsed the entire scheme. Madoff attracted $17.5 billion in investments with a promise: a steady 10% annual return, making easy money regardless of market ups and downs. He infiltrated high-end social circles, leveraging word-of-mouth among friends and business partners, continuously attracting new investors, using new investors’ principal to pay early investors’ “profits.” Until the cash flow broke down and the truth was revealed.

$2 billion crypto scam

In 2019, the PlusToken wallet, claiming to be blockchain-based, suddenly collapsed. This app promised monthly returns of 6%-18%, claiming to profit through crypto arbitrage trading. In reality, PlusToken was a traditional pyramid scheme wrapped in the trendy “blockchain” concept. In less than two years of operation, it defrauded about $2 billion in crypto assets, with $185 million already cashed out. When withdrawal functions failed and customer service disappeared, investors finally woke up from the nightmare.

Why do so many people get scammed? The psychology of Ponzi schemes

To understand why Ponzi schemes are so persistent, you must grasp their operational logic. These schemes are not genuine investments but carefully designed wealth transfer games—using the funds of later investors to pay “profits” to early investors. The seemingly reasonable return figures are impossible to generate through any legitimate investment; once new funds stop flowing in, the entire system collapses immediately.

Scammers exploit human greed, using promises like “guaranteed profit” to lure ordinary people with limited financial knowledge. They often create an illusion of “mysterious professionalism,” deliberately designing complex and obscure investment strategies, making investors feel they lack understanding and thus trust the scammer’s expertise even more.

The origin and evolution of Ponzi schemes

This term originates from a classic scam in 1903. Italian immigrant Charles Ponzi, after sneaking into the US, worked as a painter, laborer, and more, even serving time in Canada for forgery. In 1919, he seized the opportunity of post-war Europe’s economic chaos, claiming he could profit by reselling European postal reply coupons, and devised a high-yield investment plan. In just over a year, about 40,000 Boston residents were duped, each investing a few hundred dollars. Financial newspapers at the time pointed out it was clearly a scam, but Ponzi used a continuous stream of “early returns” to silence critics. He even boasted he could give investors a 50% return in 45 days. By August 1920, the cash flow was completely broken, Ponzi was sentenced to 5 years in prison, and the term “Ponzi scheme” entered the financial lexicon.

How to identify and avoid this trap?

First hurdle: Beware of “low risk, high return” lies

All investments carry risks, and risk is proportional to return—this is the fundamental rule of investing. If someone promises you daily profits of 1%, monthly returns of 30%, or even “guaranteed profits with no losses,” it’s almost certainly a scam. Madoff’s “10% stable annual return” was already highly suspicious because he couldn’t explain how profits would be generated in a declining market.

Second hurdle: Clarify the real product

Scammers fear being questioned about product details. If you ask the project leader about the investment strategy and get vague answers or are stonewalled with various excuses, that’s a major red flag. Legitimate investment firms will proactively explain the product logic, while scammers will make everything seem mysterious and inscrutable.

Third hurdle: Watch for withdrawal difficulties

Ponzi schemes often set obstacles at the withdrawal stage. Increasing fees, arbitrarily changing withdrawal rules, delaying fund transfers—these are signs of imminent collapse. Once withdrawal becomes difficult, stay alert.

Fourth hurdle: Recognize pyramid-like recruitment schemes

If someone promotes joining the project by recruiting others, promising high commissions from new investors’ principal, that’s a pyramid scheme variant, essentially an upgraded Ponzi scheme.

Fifth hurdle: Conduct background checks

Before investing, check the project’s registration and legitimacy through official business registration websites. An unregistered project is a red flag. Also, research the founders’ backgrounds—scammers often pose as “geniuses” or create a god-like persona.

Sixth hurdle: Consult professionals

If ordinary investors are unsure, seek advice from professional consultants. Don’t skip this step out of convenience; it may be your last line of defense to protect your assets.

Remember this: Never be greedy

The reason Ponzi schemes are passed down through generations is that human greed never disappears. Scammers are well aware of this, so they repeatedly use the “dream of sudden wealth” to numb investors’ rationality. Stay alert, keep your greed in check, and uphold your investment bottom line—this is more effective than any complex risk assessment tool. Remember: there are no free lunches, only carefully crafted traps.