This is the general tradecraft guide on understanding this type of investment fraud and how to spot a Ponzi / pyramid scheme as a civilian, investor or investigator.


A Ponzi Scheme is an investment fraud that involves the payment of returns to existing investors from funds obtained from consistently new investors.

These attract investors as they’re touted as “low risk with high returns”. Of which these “returns” do come quickly to satisfy investors, but is short lived.

How to spot a Ponzi scam with just one factor? If you know returns are directly and only coming from newer investors.

The scheme requires a constant stream of new “investments” in order to keep up with the payments (or “profits”) needed for earlier investors.

A Ponzi Scheme usually collapses when it can no longer acquire new investments (investors) and the fraudster’s ability to continue paying fraudulent returns to early-in investors is exhausted.

Only the originator(s) of the scheme actually profits. As for investors, despite receiving “returns”, it’s nothing compared to their deposited funds.

          The Origin of The “Ponzi”

The Ponzi scheme is named after Charles Ponzi, an Italian immigrant who became infamous for his fraudulent investment scheme in the early 20th century. Ponzi was born in Italy in 1882 and immigrated to the United States in 1903.

Ponzi’s scheme was based on the purchase and sale of international reply coupons, which were used as postage for international mail. Ponzi promised investors incredible returns of 50 percent in 45 days or 100 percent in 90 days on their money.

However, Ponzi was not actually investing the money as promised. Instead, he was using new investors’ funds to pay returns to earlier investors.

Ponzi’s scheme was highly successful, and he was able to attract tens of thousands of investors and accumulate a fortune of over $20 million (equivalent to over $300 million in today’s dollars).

The scheme eventually collapsed when Ponzi was unable to attract enough new investors to pay returns to existing investors, revealing the fraud.

Ponzi was eventually arrested and convicted of fraud, and he spent the rest of his life in prison.

            How to Spot a Ponzi Scheme
  Unsolicited Investment Offers

Be wary of unsolicited investment offers, especially those that promise high returns with low risk or that require you to make an immediate decision. Reputable businesses don’t cold call potential customers, so if someone is trying to pressure you into making an investment quickly, they may be running a Ponzi or other type of financial scheme.

  Unrealistic Returns

Be suspicious of investments that promise unusually high returns with no risk. While there are legitimate investments out there that offer good returns, nothings provides high returns without taking any risks. Be sure to do your research on any investment opportunity before putting your money in it.


One of the most obvious ways to know how to spot a Ponzi scheme is if the salesman / financial advisor uses the word “guaranteed”. Particularly “guaranteed profits”, “guaranteed safe”, “guaranteed no risk” and so on. No investment ever has existed without risk, ever. In fact, it’s even illegal to claim guarantees on investments in many parts of the world.

  Difficulty Withdrawing Money

Another sign of a potential Ponzi scheme is difficulty withdrawing funds from the account, or sudden changes in withdrawal policies without prior notice. This could be a red flag as it indicates the company may not have enough funds available to pay out their investors. As they have to wait till new investors’ money to pay previous investors.

  No Transparency

If an investment company does not disclose basic information about how its funds are managed, where its money comes from, and who runs the business, then it’s best to steer clear and look for another opportunity elsewhere. Legitimate businesses will always be willing to answer questions and provide detailed information about their operations in order to build trust with potential investors.

  Tradecraft Method


  Urgency and Pressure

Ponzi schemes often put high pressure on investors to invest quickly using unnecessary urgency, promising that the opportunity is time-sensitive or extremely limited but can’t / won’t elaborate why. Be cautious of (any) investment opportunities that require you to invest quickly without allowing you time to research or consider the investment.

  Shallow Business Model

On the surface Ponzi schemes are temptingly attractive, by design, but are in fact often lacking a legitimate underlying business model. That’s because the returns promised to investors are not generated by any real investment activity, but are instead paid from the contributions of new investors.

  Baseless Complexity

Ponzi schemes often use overly complex or hard-to-understand investment strategies to conceal the fact that they are not actually investing the money. These “strategies” aren’t even real or actionable, it’s just marketing. If the fraudster can’t explain to you in simple terms what they’re offering, it’s a red flag.

          Ponzi Scheme Examples

Bernard Madoff was an American financier who was convicted of running a massive Ponzi scheme in 2008. Madoff’s scheme is thought to have defrauded investors of over $64 billion, making it the largest financial fraud in history. Madoff is currently serving a 150-year prison sentence.

Robert Allen Stanford is an American former banker and convicted felon who ran a $7 billion Ponzi scheme through his bank, Stanford Financial Group. In 2012, he was sentenced to 110 years in prison, but he is currently awaiting a new trial after appealing his conviction.

Tom Petters is an American businessman and convicted felon who ran a $3.65 billion Ponzi scheme through his company, Petters Company, Inc. In 2008, he was sentenced to 50 years in prison; he is currently serving his sentence at the Federal Correctional Institution in Elkton, Ohio.

Raffaello Follieri is an Italian businessman who defrauded investors out of millions of dollars through a real estate Ponzi scheme posing as the Vatican’s chief financial advisor. In 2008, he pleaded guilty to wire fraud and money laundering charges; he was sentenced to four and a half years in prison and ordered to pay $2 million in restitution

Alex Mashinsky is the founder and former CEO of Celsius Network, a cryptocurrency lending / investing firm. In 2022 Celsius declared bankruptcy. It has since been revealed that the company was operating as a Ponzi. Using customer funds to pay other customers. The case is ongoing.

Sam Bankman-Fried is the founder and former CEO of FTX, a cryptocurrency exchange. In 2023, he was charged by the SEC for diverting billions of dollars of FTX customer funds into his own accounts and using them to fund his personal lifestyle while losing billions in failed investments. The case is ongoing.

            Ponzi Scheme vs Pyramid Scheme

Both types of scams are similar in that they are both fraudulent investment schemes that promise high returns with little to no risk. They are illegal in most countries, and can lead to significant financial losses for those who participate in them. Additionally, these types of schemes rely on recruiting new members in order to generate profits.

The primary difference between a Ponzi scheme and a pyramid scheme is the way they generate money.

In a Ponzi scheme, an individual or organization will use funds solicited from new investors to pay returns to existing investors. Whereas pyramid schemes require each participant to recruit additional members in order to receive payment or benefits.

Additionally, most pyramid schemes require participants to invest in products or services, whereas Ponzi schemes typically do not.


Oftentimes, authorities are too late to stop these illegal activities when they are detected. And although laws have been developed over the years to protect consumers from such fraudulent schemes, individuals should remain vigilant in order to avoid being taken advantage of by this commonplace fraud.

This is why knowing how to spot a Ponzi scheme is a necessary skill in the modern age. Fortunately, it usually just takes keen observation skills and some moderate research to identify them…

As long as greed doesn’t affect your logic.