In 2009, the concept of the Ponzi scheme became well-known. Across North America, with Bernie Madoff being the best example, Ponzi schemes crashed and burned, taking investors money with it. A high-yield investment program (HYIP) is essentially a type of Ponzi scheme. This investment scam promises an incredibly high return on investment. What makes this type of investment program so effective, and frightening, is that for a time it seems to work.
A HYIP works like this:
Essentially, a HYIP works by paying ‘returns’ to investors that aren’t actually returns, but just initial investments paid by other investors. That way, investors think that they are making money and they are none the wiser. It is only after the scheme gets too big and too complicated, with not enough money coming in to pay off all the investors, that everyone finds out it was a scam all along. When this happens, investors are often required to pay back all the money they made off the scheme, even though they had no idea anything illegal was going on.
Since the early 1900s, the HYIP scheme has thrived. In fact, the term Ponzi comes from Charles Ponzi, who used a HYIP scheme in the early 1920s. Ponzi was based on arbitraging international reply coupons for stamps. He would use new investor’s money to make payments to older investors and to increase his own wealth. This was not the original template for Ponzi schemes, but it became the most well-known throughout the world at the time, thereby making Charles’ name forever linked with HYIP.
With the advent of the internet, the amount of HYIP running has increased dramatically.
The largest HYIP ever was with OSGold. Originally founded as e-gold in 2001, the company folded in 2002. The owners of OSGold made $250 million and during the height of the scheme, more than 60,000 accounts were created for people who were drawn to the concept of HYIP, promising returns as high as 45 percent per month. The next largest HYIP was the People in Profit System (PIPS). Started in 2004, it eventually grew large enough to be found in 20 countries. However, the company was investigated by the Bank Negara Malaysia in 2005, causing the owner and his wife to be charged with 97 counts of money laundering worth $20 million. It should be noted that Barry Madoff and his scheme is not included because while it was a Ponzi scheme, it was not a HYID since he only promised returns of roughly two percent per month. Losses in Maddoff’s scheme totaled $64.8 billion.
There are several ways to spot HYID:
HYID may seem like the answer to your financial prayers, but it is nothing but a bogus claim that is meant to take your money. If you end up investing in it, you may find you are getting money but eventually the money will dry up, as will your returns. Then you will be on the hook to pay what you made so that everyone can get a portion of their money back. Keep an eye out for this investment scam so that you don’t fall into the trap. The only person who makes money from this is the person who started the HYID. No different than a pyramid scheme, you only make money if others come in after you and the person at the top brings in the most money.
Refer your friends to OptionsHouse and get your choice of $150 or 30 commission-free trades.