PONZI SCHEME

When I was young, I remember thinking: "Why do people who took loans suicide just because they can't repay the loan? They could just borrow the same amount of loan and then pay this off and continue doing so, just by rotating the money from one to another". Later in life, I got to know that I was not the first person to have gotten such a thought and that people already tried it, and that it's a financial crime. Initially, I couldn't grasp as to why this would be considered a crime since it is just using some out-of-the-box thinking to overcome a problem. But, I got to understand about the phenomenon and the aftermath associated with it later.

A Ponzi scheme is a type of investment scam where returns are paid to earlier investors using the capital of newer investors, rather than from actual profit earned by the operation of a legitimate business. In essence, the scheme relies on a constant influx of new investment to continue paying returns to existing participants, while little to no actual profitable business activity takes activity takes place. Ponzi schemes are unsustainable by nature and eventually collapse when new investors become scarce or when the operator decides to flee with the accumulated funds. The primary source of payment for paying the initial investors is the investment put in by the new investors and so, if there are little to no new investors for a period of time, the early investors will be the ones to struggle since there's no profitable business happening and the business will just be working as a 'money rotating machine'.

The Ponzi scheme is named after Charles Ponzi, an Italian immigrant who operated one of the most famous and earliest recorded instances of this kind of fraud in the early 20th century.