Unveiling the Ponzi Scheme: From Classic Historical Scams to Modern Variants

The Ponzi scheme is notorious because it lulls investors into a false sense of security with seemingly reasonable investment reasons. These scams use the funds from new entrants to pay returns to early participants, creating the illusion of a “well-operating project,” until the new capital dries up and the entire plan collapses. Only then do participants realize they have lost everything.

The Origin and Operating Logic of Ponzi Schemes

The term “Ponzi scheme” comes from Italian immigrant Charles Ponzi. In 1903, after sneaking into the United States, Ponzi worked various low-level jobs and was imprisoned in Canada and Atlanta for forgery and human trafficking respectively. After experiencing life’s ups and downs, Ponzi discovered that the fastest way to make money was not through manual labor but through finance.

After World War I ended in 1919, the global economic order was in chaos, and Ponzi saw an opportunity. He began selling an investment plan—claiming that buying European postal notes and reselling them in the U.S. could yield huge profits—and designed a complex, high-return scheme. This scam quickly spread in Boston, attracting nearly 40,000 citizens within a year, most of whom were impoverished individuals eager to get rich overnight, with an average investment of several hundred dollars.

Although financial newspapers at the time pointed out flaws in Ponzi’s plan, he did not stop deceiving. He published rebuttals in the media and threw out an even bigger bait—claiming investors could earn 50% returns in 45 days. Once initial participants tasted success, more and more joined. It wasn’t until August 1920 that Ponzi’s scam collapsed, and he was sentenced to five years in prison. Since then, “Ponzi scheme” has become a term exclusive to financial fraud.

Modern Cases of Ponzi Schemes

Madoff Case—A 20-Year Financial Fraud

Among all Ponzi schemes, the Bernie Madoff case is the most shocking. Former NASDAQ chairman Bernie Madoff orchestrated this scam for 20 years until the 2008 global financial crisis, when investors rushed to withdraw about $7 billion, leading to exposure.

Madoff leveraged his status and reputation in the finance industry, infiltrated high-end Jewish clubs, and developed a layered network of “downlines” through friends and business partners. He successfully attracted $17.5 billion in investments, promising clients a stable annual return of around 10%, and boasted that he could profit easily whether the market was rising or falling. Little did they know, these seemingly generous returns were actually built on the investors’ principal. When someone requested a withdrawal, the entire system would collapse.

In 2009, Madoff was sentenced to 150 years in prison for fraud. The case involved up to $64.8 billion, making it the largest financial scam in U.S. history.

PlusToken Scam—Blockchain Disguise of Multi-Level Marketing

With the advent of blockchain, Ponzi schemes began to adopt new disguises. PlusToken wallet is a typical example, considered the third-largest Ponzi scheme in history. According to a report by blockchain analysis firm Chainalysis, this scam group defrauded about $2 billion in cryptocurrencies outside China and Southeast Asia, with $185 million already cashed out.

PlusToken claimed to use blockchain technology and aggressively promoted in China and Southeast Asia. It promised users monthly returns of 6%-18%, claiming these profits came from arbitrage trading of cryptocurrencies. In reality, PlusToken was just a multi-level marketing organization disguised as a high-tech project. Over its year-long operation, it harmed countless investors with little blockchain knowledge. By June 2019, when PlusToken wallets could no longer process withdrawals and customer service stopped, victims realized they had lost everything.

How to Identify and Prevent Ponzi Schemes

Beware of Promises of Low Risk and High Returns

There’s no such thing as a guaranteed profit without risk. Any project claiming “daily profit of 1%, monthly return of 30%” or “investment guaranteed to win with no losses” should raise suspicion. Madoff attracted many investors with a 10% annual return, but in the real investment world, such high and stable returns violate economic principles.

Beware of Complex and Obscure Investment Products

Ponzi scheme creators often deliberately design investment strategies that are overly complicated and difficult for ordinary investors to understand, hiding the flaws. In fact, these projects lack real products or business foundations; their mystique is just a cover-up for deception.

Proactively Research Project Information

If you inquire about project details from the project team and receive vague or no clear responses, it’s a warning sign. Legitimate investment projects should be willing to disclose information transparently, not hide it.

Verify Project Qualifications Through Official Channels

Check whether the project company is legally registered and its registered capital through official business registration websites. Unregistered or improperly registered projects are inherently risky and should raise red flags.

Be Cautious of Withdrawal Difficulties

Ponzi schemes often set up obstacles to hinder withdrawals—raising fees, changing withdrawal rules arbitrarily, or setting complex unlocking conditions. If you notice excessive barriers to cashing out, stop investing immediately.

Identify Pyramid-Like Promotion Models

Many Ponzi schemes use layered referral methods, earning high commissions through recruiting others and developing downlines. If someone invites you with phrases like “bring people in to make money,” be extra cautious.

Research the Project Initiator

Ponzi scheme founders often portray themselves as geniuses or leaders. For example, Sergey Mavrodi, founder of 3M Financial Mutual Aid, gained trust by creating a “hero” persona. Before investing, thoroughly investigate the background, resume, and reputation of the project’s initiator.

Seek Professional Advice

If you’re unsure about an investment, consider consulting a professional financial advisor. Experts can help you identify risks and avoid blindly following the crowd.

Maintain a Rational Mindset

Fundamentally, Ponzi schemes succeed repeatedly because they exploit human greed. The promises of huge profits and financial freedom often cause investors to abandon rational judgment. When making investment decisions, stay alert, suppress greed, and stick to your bottom line.

Conclusion

Ponzi schemes have persisted from Charles Ponzi’s era to today, lasting over a century. This demonstrates that the human desire for quick profits has never changed. No matter how scammers package their projects—be it stamps, stocks, cryptocurrencies, or blockchain applications—the essence remains the same: using new entrants’ funds to sustain the promised high returns to earlier investors.

There is an iron law in investing—risk and return are always proportional. Remember this, think carefully before every investment decision, and you can effectively avoid becoming the next victim of a Ponzi scheme. Stay vigilant and keep your rationality intact in the pursuit of wealth.