What is the difference between a Ponzi and a Pyramid Scheme?

Free money!

Everyone loves free money. 

In the same way, everyone wants to see their money grow faster than the terrible 4-8 % that the bank offers. 

Even if there’s risk involved that’s okay – risk vs rewards is the name of the game!

With the recent surge in pyramid and Ponzi schemes, this post is actually one of my more serious posts – it’s a warning that you should not attempt to invest in these wonderful projects.

  • The money is never invested. It’s recycled, i.e. take money from new investor Peter to pay Paul. 
  • There’s normally no true product that it’s selling – it’s an ‘investment’
  • They have secrets about how this money is made – which they cannot share – e.g. secret Forex trading, crypto mining in secret low-cost locations and so forth.
  • It follows the shape of the magical upside-down diamond – the pyramid. People at the top get paid and the last investor in loses everything.

The back story

So, there was this guy called Charles Ponzi.

In the 1920’s he created a wonderful new business.

Here’s the background: In the 1920’s you could buy an international postage stamp (called an ‘International reply coupon’) in many countries: $ 1 in the states, € 1 in Europe (yeah, I know, it wasn’t there yet), £ 1 in the UK – you get the drift. 

As you can tell, there’s a difference in the true value, like $ 1 and £ 1 do not have the same value. In Italy, you could make a  400 % profit from these compared to the US!

So Ponzi created a business where he, within 45 days would give you 50 % profit by buying and selling these coupons. Well, he made people believe that he was buying and selling the coupons.

Everyone was loving the idea, and it made sense! And the profits were so sweet. 

The issue was that he took the money of new investors and paid back their money to the older investors. They did not use the coupons as was proclaimed by the company. On the contrary, there were not enough coupons in the US for the number of dollars in the company.

After a year, with no new investors coming to the forefront, the scheme collapsed and people lost $20 million in 1920 dollars (approximately $193 million in 2018 dollars).

What are we thinking?

Money. Greed. More money. 

We want exceptional secret returns with a little risk – and we want it now.

The issue is that we want to get ahead without hard work. We believe that if we can get above-average returns, our lives will be awesome. 


I know of quite a few cases in the last two years of Ponzi schemes. The story hasn’t changed. Here are some examples:

  • I have a friend that lost his life savings in a Forex scheme that promised 6-10 % per month
  • The WhatsApp group that’s been doing the rounds where you had to pay money to get in.
  • Crypto mining – there are these awesome companies that offer higher returns than what you can make from mining yourself, even without the electricity costs.
  • KaratBars – yeah I know it’s controversial, but it does have all the signs. And this is my blog – so I can write my opinion.
  • Madoff – he did a great job in making people lose their life savings

Please, be vigilant out there. Everyone wants your money. It’s not just the brokers and rental agents.

They want to take your money and buy nyaope with it. 

Multilevel marketing and the pyramid

Yes, I will get stabbed for this part.

Is this the same thing? Nope, it’s not.

Multilevel marketing works on the same principle, except that the company delivers a product or service that adds value from the beginning.

The question we need to ask though, is does it add value to my life?

Be careful when investing time and effort in this, as many require you to actively find victims to join. I am of the opinion that this is the quickest way to burn bridges with friends and family.

There are some companies out there that are awesome and add value. Here are a few that I find have superior products:

  • Herbalife – their shakes are awesome
  • Amway – their water purification systems are phenomenal for the health-conscious.

Note that I am not advocating these companies in any way – on the contrary, I vomit all over people offering me a meeting to a new ‘revolutionary business opportunity’

How to identify a Ponzi scheme

The US Securities and exchange commission did a great job in defining this (link here):

  • High investment returns with little or no risk. 
  • Guaranteed investment returns
  • Overly consistent returns.
  • Investment companies not registered with the Financial Services Board
  • Unlicensed sellers – through selling financial products, many sellers are not financial advisers or registered with the FSB.
  • Secretive or complex strategies. Investments that cannot be understood or do not give complete information.
  • Issues with paperwork – there are often statement errors and issues with managing the paperwork to make it look official
  • Difficulty receiving payments – the Ponzi scheme could have cashflow issues and will encourage reinvestment.


Don’t be stupid. Check all the facts before investing. 

Ask questions. Here are a few:

Is the seller licensed? Is the investment registered? Do I understand the investment? Where can I turn for help?

Remember, if it sounds too good to be true – it probably is.

Happy not investing in Ponzi schemes 🙂