How to build a Ponzi Scheme

Understand why these scams work, and how you might protect yourself against them.

Photo by Ruthson Zimmerman on Unsplash

Recently, I had a conversation with a close friend who, reluctantly, told me about an investment scheme that she was invited to take part in. I have to admit; I was initially intrigued. My first thoughts were that this was a legitimate initiative by the authorities to promote tourism and industry in their state. After all, my friend is a smart and intelligent professional.

But after a few questions, red flags were everywhere.

My friend did not eventually ask me to invest. But I could tell the struggle to keep the details of this “investment opportunity” vague and secret.

Subsequently, a few quick searches on Perplexity threw up enough information to suggest that this “opportunity” was just a newer version of the infamous Guangxi Ponzi Scheme, also commonly known as the “1040 Sunshine Project” or “Nanning Scheme” in the early 2000s. This scheme is now targeting Singaporeans and Malaysians.

I told my friend that I suspect this is a new version of the same Ponzi scheme. She dug in her heels. She trust her friend who brought her in. She has decided. She will take full responsibility for her decision. There was nothing left to be said.

These fraudulent schemes have been around for over a century, yet they continue to trap millions of people worldwide, causing financial ruin and emotional distress.

I want to explore this and hopefully help readers understand how scams and Ponzi schemes work, why people fall for them, and how you can protect yourself.

What is a Ponzi Scheme?

A Ponzi scheme is one of the oldest types of financial fraud. It’s named after Charles Ponzi, an Italian swindler who became famous for orchestrating a massive fraud in the early 20th century.

At its core, a Ponzi scheme is a deceptive investment scam that pays returns to earlier investors using money from newer investors, rather than from legitimate profits.

In 1920, Charles Ponzi promised investors in Boston, Massachusetts, a 50% return on their investment in just 45 days, or a 100% return in 90 days.

He claimed to achieve these extraordinary returns by exploiting a loophole in international postal reply coupons, which allowed him to buy them cheaply in one country and redeem them at a higher value in another.

However, Ponzi wasn’t actually making money from postal coupons. Instead, he used money from new investors to pay “returns” to earlier investors. This created the illusion of a profitable business and attracted even more people.

At its peak, Ponzi was raking in millions of dollars, but the scheme collapsed when authorities investigated and discovered there was no real investment. Ponzi was arrested, and his name became synonymous with financial fraud.

The Greater Fool Theory

Ponzi schemes rely on the greater fool theory, which is the idea that you can profit from an investment by selling it to someone else (the “greater fool”) at a higher price, regardless of its actual value.

In a Ponzi scheme, the scammer depends on a continuous stream of new investors (the “greater fools”) to keep the fraud alive.

• Early investors are paid with money from later investors, creating the illusion of success.

• These early investors are encouraged to reinvest their “profits,” believing the scheme is legitimate.

• The scammer continues to recruit new investors, each one becoming the “greater fool” who keeps the scheme afloat.

• Eventually, the pool of new investors dries up, and the scheme collapses, leaving the last investors (the “greatest fools”) with nothing.

How to build a Ponzi scheme

This is how. But it will not have a good ending, for you or anyone involved.

Step 1: You need a Big Idea

Every Ponzi scheme starts with a big idea—something that sounds exciting, innovative, and too good to miss. Something like a “DeFi (Decentralised Finance) investment fund” that promised 20% monthly returns with “zero risk.”

People would be skeptical, so dressed it up with fancy jargon like “algorithmic trading,” “Deep Learning Portfolios,” “blockchain technology,” and “VIP access.”

The key was to make it sound complicated enough that people wouldn’t ask too many questions, but simple enough that they believed they could get rich without effort.

Step 2: Build Trust

Trust is the foundation of any successful scam. Start by targeting people you know—friends, family, and colleagues. They’d be more likely to trust you, and once they were on board, it is easier for them to bring in others.

Create an illusion of legitimacy. Set up a professional-looking website, rent a fancy office, and hire a few employees to answer phones and send out statements. Print glossy brochures and use terms like “SEC-compliant” and “Regulated Crowdfunding” to make everything seem legitimate.

Step 3: First Investors

The first wave of investors is crucial. Offer them guaranteed returns and pay them on time. These are your baits. This will create the illusion that your investment is legitimate and profitable.

Then, encourage them to reinvest their profits. This keeps the money flowing into the scheme. And, of course, asked them to spread the word. But not to too many people. Just a few and not more. Make it exclusive. Consider referral bonuses for every new investor they bring in.

Step 4: The Greater Fool Theory

At its core, a Ponzi scheme relies on the greater fool theory—the idea that there will always be someone else (a “greater fool”) willing to invest, allowing you to pay off earlier investors.

It’s a fine balance. You must have enough fools entering the scheme to keep it going. Work fast. But also take your time. The speed at which the scheme spins (out of control) will speed up. But it cannot last forever. The goal is to keep it going as long as possible.

Step 5: Exploit Human Weaknesses

Exploit every psychological trick in the book. Don’t just rely on greed.

• Greed: This is the foundation for all scams. Without greed, most scams would not work. High returns with little or no risk. Exclusive deals. Get rich quick. Who wouldn’t want these?

• Arrogance: Make investors feel they are in-the-know. Give them a fancy vocabulary to use on their friends and family. Make it sound sophisticated so that they believe they are investment experts. That they know better than anyone.

• Fear of Missing Out (FOMO): Created a sense of urgency by saying things like, “This opportunity is only available for a limited time!” “We are not accepting any new investors but I can try to make an exception just for you IF you can decide now.”

• Social Proof: Testimonials, even fake ones, work like a charm. Make it feel like everyone is getting rich. Ultimately, they WANT to believe, so give them the reason to believe.

• Trust: Do not underestimate the importance of personal relationships and word-of-mouth referrals to build credibility. Most will start with their best friends and family. And if they are also greedy, it will be like a walk in the park.

Step 6: Keep the Illusion Alive

To keep the scheme going, maintain the illusion of legitimacy.

• Fake Statements: Send out monthly statements showing imaginary profits and account balances. Don’t overdo this, though. Make it exciting but believable.

• Complexity: Make the investment strategy sound so complicated that most people didn’t bother asking questions. And make it proprietary (secret) because “we don’t want others to steal it.”

• Delays and Excuses: When investors ask to withdraw their money, say things like, “But you would lose the compounded returns if you withdraw now,” or “There’s a termination/fund release fee for early withdrawals.”

Step 7: The Inevitable Collapse

No Ponzi scheme can last forever. Eventually, the math will catch up with you. When you can’t recruit enough new investors to pay the returns to previous investors, it will unravel.

This will happen when investors demand their money back, and you don’t have enough to cover the withdrawals. Buy time, make excuses, go on holidays and find scapegoats. It will be a matter of time before the whole thing collapses.

Step 8: Exit Plan

Disappear. You will leave behind thousands of devastated investors who have lost their life savings. Some of them are friends and family who trusted you completely.

You will always look over your shoulder, afraid of getting caught or killed, or both. And when you are arrested, you will face the consequences.

It never ends well.

Final Thoughts

I hope my friend will realise that she’s a victim of a Ponzi scheme. I hope she will recognise that the friend she claims to trust completely is no friend at all. I hope she knows that by perpetuating the “investment programme” and inviting others to join, she will become an accomplice, a scammer, and a criminal.

I hope she reads this. I just want her to be safe.

Scams and Ponzi schemes exploit human psychology. But with knowledge and vigilance, you can protect yourself. Remember the golden rule: if something sounds too good to be true, it probably is.

Educate yourself, ask questions, and always verify before investing.

Share this article, and let’s help others avoid falling victim to these devastating schemes. Together, we can build a more informed and resilient community.

Have you or someone you know encountered a scam or Ponzi scheme? Share your story in the comments below to help others learn from your experience. If you found this article helpful, please share it with your friends and family to spread awareness.

---

I hope you enjoyed this article. While "What Matters" is free, I do appreciate your support as a paid subscriber. If you don’t do subscriptions, you can also buy me a coffee. Either way, it means a lot.

Thank you for being here. Please remember to like, restack, and comment.