Ponzi vs: Pyramid Scheme: What’s The Difference?

People use the terms Ponzi schemes and pyramid schemes interchangeably to describe frauds that pay early investors with money contributed by later investors. Both schemes share common traits like generous returns and quick payouts. Are they really the exact same thing? 

They are not. There are striking similarities, however. When cash outflows are matched by monetary inflows, Ponzi and pyramid schemes are self-sustaining. There are basic differences between schemers’ products and their ploys, but both can prove devastating if broken.

Ponzi Schemes

A Ponzi scheme is a fraudulent investment scheme promising unusually high returns, often over a short period of time. The get-rich-quick promise is so attractive that even conservative investors find it impossible to pass up. Fantastic returns are the hallmark of a Ponzi scheme. 

In reality, the profits investors are paid are just a return on their original investment or the capital of later investors. The scam works as long as new money keeps flowing in. That money can be from new investors, but an integral part of most Ponzi schemes is convincing existing investors to re-invest their proceeds and ideally contribute even more. 

Many do since the Ponzi scheme promises much higher returns than an investor can find anywhere else. This is how otherwise astute investors succumb to greed and put all (or most of) their funds into one investment. More often than not, they lose their life savings. Usually, the investment is described in vague terms or in jargon too complicated for the average person to fully understand. This is done on purpose. Complexity obfuscates the painful truth: there is no underlying investment.

Pyramid Scheme

Pyramid schemes are unsustainable business models used by fraudsters to entice participants with promises of quick, exceptional returns. The business begins with a few top-level participants or members recruiting new ones who pay them upfront fees in order to participate.

In other ways, when you join their schemes, you give your money to the investors before you. The earliest contributors to the scheme are usually the only ones who make any money. Each participant only has access to a limited amount of the scheme’s money, since he only gets the payout from people who invest after he does. 

Pyramid schemes require everyone to be actively involved in recruitment. The participants are acutely aware that without the momentum of new investors, the whole thing will collapse. Payments to people at the top of the pyramid depend on getting new peoples’ money in at the bottom. 

This self-recruitment is the most easily recognizable hallmark of a pyramid scheme. While those entering a pyramid scheme may understand how it pays out, they are unlikely to know whether they are entering at the pyramid base, or at a later stage, when there is a  greater risk of the money flow grinding to a halt. 

The person starting the pyramid might also list “sham” contributors to make it appear there are more people contributing than is really the case. In this way, he keeps more of the incoming funds, since the next level of contributors pays the person above them.

The so-called profits never last very long. These artificial returns are ill-gotten gains and can only continue as long as new investors join the scheme.

Ponzi vs. Pyramid Scheme: The Key Differences

Passive vs. Active Involvement 

For ease of reference, we will call contributors in either scheme “investors”,  only because that is how the contributors often label themselves. We use the term investor very loosely since it is painfully obvious that neither the Ponzi nor the pyramid scheme are anything close to legitimate investments. 

Strangely enough, most pyramid investors know a collapse is inevitable at some point. Like children playing musical chairs, there is a very real fear that they will not get a seat when the music stops. However, because they are actively bringing in new investors, they feel a false sense of control. They are certain they can both recruit enough people to ensure their own payout and foresee the eventual implosion in order to jump out ahead of a collapse. Of course, rarely do people play the game for a short enough time, and most will lose their money. 

Contrast this with a Ponzi scheme, where the investor hands over his money with no active involvement afterward. Naturally, the Ponzi investor assumes his investment is both passive and legitimate. In other words, he incorrectly assumes his money is under professional management. As we know, nothing could be further from the truth.

Sense of Urgency 

In a Ponzi scheme, only the fraudster feels a sense of urgency after the original investment. Ponzi scheme investors believe their money is in a bona fide investment that they plan to hold for a long time. They believe their only risk exposure is overall market fluctuations. 

Contrast this with a pyramid scheme, where all the contributors feel a need to act quickly. They know that without new money, the scheme will collapse and they will lose their money. They must remain highly motivated to recruit new contributors to the pyramid or they won’t get paid. Both schemes play on our sense of greed.

Perception of Legitimacy 

Pyramid scheme investors often sense that what they are investing in might be illegal. Even so, the promise of such lucrative returns lends an air of excitement. On some level, they worry it is too good to be true, but don’t want to miss out on the action. 

They know that most pyramid schemes will fail to make money at best and lose all their money at worst. Yet they assume they are contributing at the right time, so it is worth the gamble. To many people, it is like buying a lottery ticket.

Investment Size and Number of Investors 

Since pyramid schemes typically involve smaller amounts of money than Ponzi schemes, many more investors are required. Each person must recruit many people below themselves for a chance of a payout. Small investments from many people indicate a potential pyramid scheme. 

A smaller investment also means that not only are pyramid scheme participants less likely to investigate the details upfront, but they are also less likely to pursue legal action when the gambit ultimately fails to pay off.

Investment Horizon 

The investment horizon or payback time represents the amount of time be- tween investment and redemption. Typically, the time horizon with a pyramid scheme is very short, often weeks. A few of the most successful pyramid schemes in history have lasted 12 to 18 months, which is unusually long. A pyramid scheme’s continued operation requires the constant recruitment of large numbers of people by many others, so it does not take long for something to fail. A pyramid scheme is like a chain letter—one pause and the pyramid collapses.

Ponzi schemes tend to last longer, often years or decades. There are fewer investors, each usually contributing much larger amounts than in a pyramid scheme. The large sum of money in a Ponzi scheme in itself provides stability and staying power. All the amounts are controlled and manipulated by the Ponzi schemer, who will of course do everything he can to stretch the time horizon. By convincing you to roll over your investment, he can manage cash levels effectively.


Ponzi schemes and pyramid schemes both rely on affinity, just in different ways. Ponzi schemes target groups of people, affiliated with a common association. It could be religion, nationality, or political beliefs. The European Kings Club Ponzi used a conspiracy theory as a common theme—us against them. We trust people like ourselves. We might also feel akin to people on our side when facing a common adversary. 

Pyramid schemes rely on affinity with a twist. Because the investor is required to recruit a multitude of new members, he naturally approaches friends and family. Word of mouth implies trust. There are no better salespeople than those you know and trust. Since we tend to associate with people most like ourselves, the end result is a natural affinity. This is why people involved in a pyramid scheme tend to originate from the same background. 

Since a pyramid scheme requires so many more people, it will also spread like wildfire. You will likely hear about it simultaneously from multiple sources. If your 80-year-old grandmother is feverishly recruiting her fellow parishioners at church, it could be a pyramid scheme. If you hear about an opportunity to strike it rich from several different people in your social circle, it might be a pyramid scheme. If they all urge you to contribute—and fast, before it collapses—then it is definitely a pyramid scheme. 

Perhaps you hear stories of fantastical returns—only the success story is a  friend of a friend, never someone you can independently verify. Such an unprovable claim almost always points to a pyramid scheme.


Once fraud is uncovered, funds are frozen and proper accounting is necessary to unwind each transaction and determine the ownership and division of any remaining money. This can be complicated, given that the true nature of the scheme was misrepresented from the start. 

Forensic accountants can trace back each transaction and restate them to reflect the true nature of the scheme, and determine how to divide any recovered funds. Since the claimed investments were never made, any “profits” were merely redistributions from one investor to another. These need to be unwound to give everyone back their money, or at least a proportionate share of what is left. This unwinding is usually only done for larger Ponzi schemes since they typically involve significant amounts of money per investor. 

Since pyramid schemes rely on a much higher number of contributors with smaller amounts per person, it is not feasible or even possible to trace back the source of funds to each person. The end result is the same under both schemes. Almost all contributors are equally out of pocket, not only from the fraud of the Ponzi or pyramid scheme but also because of legal expenses to recover the stolen funds. 

The Securities and Exchange Commission characterized Burks’ Rex Venture Group and ZeekRewards as a combined Ponzi and pyramid scheme. While new investors paid their money to ZeekRewards, thousands of them actively advertised for new recruits. They earned points for new recruits, which could ultimately be converted into cash. 

Thus, Burks’ points scheme was a thinly disguised pyramid scheme, with the points equivalent to the cash contributions. However, the key difference that made it a Ponzi scheme was that all the money was under his control. Anyone wanting to redeem points had to go through him. 

As in other Ponzi schemes, the actual earnings were much smaller in magnitude than what Burks claimed, so there was never enough cash to convert outstanding points into cash. Burks’ scheme ultimately failed when too many people wanted to convert their points into cash. There was not enough cash to back the claims. 

The SEC alleged that he sold securities in violation of federal securities laws in a civil claim. In August 2012, Burks pleaded no contest and turned his company, Rex Ventures, over to a receiver. He paid a $4 million civil penalty (what was left in his possession) and ceased operations. He was later sentenced to 15 years in prison. Pyramid schemes, like Ponzi schemes, are illegal in many countries, including the United States, the United Kingdom, and Canada. 

Usually, once a largescale fraud of this type takes place, countries pass laws to render it illegal. Pyramid schemes are still legal in many countries, simply because this swindle has not occurred on a wide enough scale to develop laws to prevent it. Sadly, laws are often enacted after the fact, and only after inflicting widespread harm to many people.

Famous Pyramid Schemes 

Several of the largest pyramid schemes occurred in Eastern Europe after the fall of communism. People were poverty-stricken but optimistic about their newfound freedom. Having never experienced free-market economies, they did not see anything amiss with the outsized returns promised them. 

One of the largest pyramid schemes took place in Albania in 1997. The tiny European nation covers less than 30,000 square kilometers and is home to less than three million people. It is hardly the place you expect to find rampant fraud. However, if the conditions are right, certain people use those conditions to their advantage, and a country newly emerged from communism is an easy target. A multitude of pyramid schemes took the country by storm in the 1990s, causing strife and ruin. 

The early to mid-1990s was a time of great social and economic upheaval in Albania. The communist dictatorship of Enver Hoxha had toppled after almost fifty years of rule from 1944 to 1992. Like Russia, Albania transitioned to a free market economy but not easily. The country was impoverished, lacked financial and legal infrastructure, and had no exposure to capitalism. In other words, it was the perfect environment to unleash one of the biggest pyramid schemes to date on an unsuspecting population. 

The first scheme occurred in 1991, run by a former government official. At the peak of the pyramid scheme explosion, fully two-thirds of Albanians had invested in one or more of the schemes. By 1997, the schemes crashed so profoundly that the Albanian Rebellion of 1997 also became known by another name—the Pyramid Crisis. Though the population of Albania was a mere three million people, total losses were estimated at over $1.2 billion. 

That is a staggering amount of money to remove from the economy of an impoverished country. The pyramid collapse plunged the nation into full-fledged revolt and chaos. Albanians suspected government involvement in the schemes and staged violent demonstrations in the streets. Before United Nations troops moved in, more than two thousand people had died in the uprising. The country’s finances also collapsed. At least twenty-five pyramid schemes collapsed in 1997 alone. 

Albania wasn’t the only country where widespread fraud of this type occurred. It has happened in Russia, Romania, Bulgaria, and Serbia. Nearly every country transitioning from communism to a free market economy has seen huge losses in these schemes. Countries in transition from communism often lack regulatory bodies. The economy was previously tightly controlled by the state, and there were no capital markets. 

The new market economy lacks the rules and controls for adequate oversight. They also might also lack laws specifically outlawing pyramid schemes, so there would be no repercussions to the organizers. A transition to a free market economy also often involves economic hardship. The country’s currency might have been artificially pegged to another currency, and many economic staples are subsidized. 

As the country moves to a free market economy, the currency could devalue, often substantially. Much of the population lives in poverty, so a get-rich-quick promise of a pyramid scheme is very enticing. 

Lastly, citizens in these countries have had limited or no exposure to capitalism. Never having had their own money to invest in business opportunities, they often fail to recognize that the advertised rewards are unlikely to materialize. 

What seems inconceivable to many people in free market economies seems possible to those getting their first taste of capitalism. When they are bombarded with images of vacations and luxury goods, they take the outrageous promises at face value.

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