Differences between Ponzi schemes and pyramid schemes

Bernie Madoff is arguably the most infamous Ponzi schemer in recent memory. In 2015 alone, 61 more Ponzi schemes became uncovered, and more are discovered each year. 

While many people use the terms “Ponzi scheme” and “pyramid scheme” interchangeably, there are some differences. There are naturally some similarities as well, and when facing charges, it is important to understand the differences.

How they work

There are key differences in how each type functions. In a Ponzi scheme, people simply hand over money to a representative who promises a certain return on investment. In pyramid schemes, people most often have to sell a product. There is the tantalizing aspect of people selling items and making their own money. As such, pyramid schemes require investors to play a much more hands-on role. For Ponzi schemes, there is hardly any level of involvement after the initial investment. 

How people receive payment

In both variations, people earn money from the contributions of new members. For Ponzi schemes, members assume they make money off investments when in actuality, they make money off the investments of others. For pyramid schemes, members are generally more aware they make money off new recruits because they sell products to these citizens. 

How long they typically last

Both variations could feasibly last forever, but Ponzi schemes tend to have a much longer shelf life than pyramid schemes. For example, Bernie Madoff’s Ponzi scheme was only discovered after it was in operation for 30 years. Since pyramid schemes require people to recruit more members and sell products, they tend to fall apart more quickly. Pyramid schemes rely on the cash from sales to remain afloat. 

Most of the time, the only person who faces consequences when either one comes to light is whoever initiated the scheme. Participants are typically oblivious to the illegal activity taking place. Additionally, both of these differ greatly from multi-level marketing campaigns, which generally sell legitimate items.