When I got this Question from a Friend of mine who just lost a lot of Money to one such scheme so I decided enough is enough:
Well you can read the story of the closures and investigations here:
http://www.newtimes.co.rw/section/read/214147/
QN: Hi DaVid you mentioned these things Ponzi Scheme, Pyramid scheme and Economic Bubble. What is the difference?
First Things First Lets Get Basic Definition of this blog
dupe (do͞op, dyo͞op)
n. A person who is easily deceived or is used to carry out the designs of another.
Reduped: Means you have been used/deceived to again.
While there are truly many genuine Investment opportunities out there in the Financial Industry and Network Marketing Industry, It is worth your time to study the industry before throwing your hard earned cash and Energy into a company, assets or products that may actually make your life harder than it was before.
This Blog does not intend to defame or promote any product or company but to teach you how to discern when you are being duped.
You can ask your Questions/Comments in the comments box...I try to answer them if i ever get time to Look at it again.
I have used reference to wikipedia.
https://en.wikipedia.org/wiki/Ponzi_scheme
Briefly There are four main Schemes:
1. Ponzi Scheme
2. Pyramid Scheme
3. Economic Bubble
4. Pyramid Bubble
I will try to be as brief as possible in describing them for you.
1. Ponzi Scheme
A Company / Individual and their proxies collects money from several individuals promising to invest it in assets (Just like a normal Hedge Fund, SACCO, Investment Club, Social Fund).
However the company doesn't invest the funds and instead uses money from new investors to pay old investors and himself/theirselves big bonuses.
Ponzi schemer uses vague verbal guises such as "hedge futures trading", "high-yield investment programs", or "offshore investment" to describe its income strategy taking advantage of a lack of investor knowledge or competence on part of the victim, or claim to use a proprietary, secret investment strategy in order to avoid giving information about the scheme
When inflow of new investors are no longer coming in The Ponzi Schemer now recycles his old investors to invest more into the fund and the cycle begins again.
Ponzi Schemes can last for years even decades.
[On collapse all Investors loose their "non existing investment" with the schemer and his proxies heading to Jail]
2. Pyramid Schemes
A Pyramid scheme is a Ponzi scheme Masquerading as Network Marketing Company. The Schemer takes money from the new Investor and pays Old investors using otherwise Legal Network Marketing Techniques without actually making any of the promised Investments nor providing Tangible products in return.
Pyramid Schemes use the same verbal guises as Ponzi Schemes to cover their true operations to unwitting "Investors" using Legal Network marketing Techniques to Recruit Proxies.
Due to their exponential increase, the pyramid schemes make the Original schemers (called a Pharaoh) very Rich very fast, however due to their sheer speed they collapse very fast.
[The biggest losers are those individuals that "Invest" Just before it collapses or is stopped by law enforcement]
Because of the sheer size of the scheme, its hard to carryout prosecution of the proxies however if the pharaoh is under jurisdiction of the law enforcer stopping the scheme then prosecution can be done.
3. Economic Bubble
Economic Bubbles originate from the free market space. Bubbles driven by rumors and beliefs generated by usually unknowing schemers, pumpers and dumpers, or even by Government Announcements. This causes people to believe that an Item is more valuable than its intrinsic Value. Causing a Frenzy buying at ever higher prices e.g (Tulip bubble, several stock Market bubble,Assets Bubble of Japan, dotcom bubble of 2000s, Housing bubble of 2008, several crypto-currency bubbles).
This called greater fool theory.
Economic bubbles collapses when the suddenly there are no greater fools willing to buy at higher price, then owners of these financial assets go into frenzy selling to recover some of the lost wealth causing the down ward spiral.
Economic Bubbles usually happens when there is a new innovation in the market or a mistake of nature like Tulip Mosaic virus attacking a few Tulip flowers, or a government announcement coming out at the right time.
Unlike the first two economic bubbles can affect full countries even global markets, wiping out wealth for those involved and those who are not involved.
Again unlike the other 3 economic bubbles are natural in a free market and actually help create new industries by focusing the minds of the general population to optimize those new industries. e.g Tulip Bubble created a $120Bn Flower Industry, and many people are earning as Florists and Selling Tree cuttings and Seedlings.
The DotCom Bubble preceded the Internet revolution seeing Internet Giants Like Google, Facebook, Amazon Rising up from the ashes of the bubble.
and crypt-currencies are set to dominate the financial world, as more minds
focus on optimizing the technology.
The Criminal elements in economic bubbles may occur when Owner of Large Undervalued assets Pumps and Dumps them. Causing their perceived Value to Rise Sharply during the pump and falling sharply after the dump, accumulating a lot of profits in the process for the pump attendant.
4. Pyramid Bubbles
Like Ponzi Scheme is to a Pyramid Scheme, a Pyramid bubble is the younger brother to the Economic Bubble.
A Pyramid bubble works as a Genuine Network Marketing Company, However as the economic bubble it also operates on the free market principle of The greater fool theory.
To pull off this scheme, the schemer Fuses Network Marketing Principles into their bubble by spreading rumors about properties and qualities of their product. Usually their claims are based on pseudo science which sometimes dangerously putting peoples lives at Risk.
Schemers in this category use Branded Magical Food Supplements, Health Based Products, Enchanted Stones, Fake / Low Quality Jewelry (priced at premium), Magical House Hold Items, Life magnifiers/enhancers etc.
For example:
A woman in Masaka (Uganda) spread a rumor in the late 80s and early 90s that she can cure HIV with some type of black Clay (She actually was adding some kind of arv to the clay) so unwitting victims started looking better she assured them they were cured of the disease. They would go out and spread the disease further expecting to go back to be cured if they caught the virus again.
With the rumor well underway and spreading like wild fire about this new found technology, the schemer Pumps up the price of their product way above its intrinsic value then promises wealth to recruiters on premise they can get friend first buy first Buy/Stock the Product at this "Out the roof Price" then to Resell or Recruit New Distributors of this super expensive magical product.
This is point where the most unknowing and unwitting among us GET REDUPED.
Pyramid bubbles do not entirely burn out rather they relocate to greener recruiting areas. With those closer to the pharaoh willing to migrate to greener pastures.
What BUSTS kind of Pyramid Bubbles:
- Broken promises
- Unusable Inventory
- Saturated Market causing slow sales for " distributors".
- Troubled economic conditions (especially recessions)
- Supply and Demand don't affect the price of the product (meaning Prices are doctored)
While Freemarket Forces are at Play in this kind of scheme, Government Agencies and Like Bureau of Standards, Drug Authorities, Consumer Protection Units Need to step up and confirm that products being sold are safe, work and they claim to work.
However it should also be the Individual's responsibility to learn, research and understand the Industry they are investing their money in, so as to avoid disappointments.
Last word:
If you think Knowledge is Expensive, Try Ignorance.
