Research has shown that a Ponzi scheme is an investment fraud that involves the payment of alleged returns to existing investors from funds contributed by new investors. The money that pays the current investor comes from a new investor.
There is no actual investment activity in a Ponzi scheme; it is simply like taking a loan to pay another loan. The lifeblood of a Ponzi scheme is a new investor and when it eventually becomes difficult to recruit new investors or when a large number of investors ask to cash out, the whole thing collapses. Ponzi schemes use a formula known as a three-by-four matrix. For example an investor pays P500 to the promoter and is told to build a "downline" by recruiting three new members, who then each should recruit three more members. The investor is told that he will be paid P150 for each of the three members whom he enlists at the first level. The investor is also promised a P30 commission for each recruit at the next three levels.
Thus, the investor should receive commissions for four levels of recruits below him, each of whom must recruit three more members, hence the name -- a three-by-four matrix.To the potential investor/recruit this may look like a very appealing opportunity. The pyramid promoter is likely to persuade the investor that he is "getting in early" and that he should consider himself at the top of the matrix. From this perspective, it appears that he can earn P3,960 on an investment of P500, a whopping 792 percent return. You can do the math easily: P150 from the first level of 3 recruits is P450; P30
When the pyramid collapses like EurexTrade, all the investors in the bottom two levels will be losers. Adding together the number of victims from these bottom two levels shows that 108 pyramid's participants are doomed to lose money.Ponzi schemes can be identified by their high investment returns with little or no risk. Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any "guaranteed" investment opportunity that promises consistent returns.
Most of them appear to be unlicensed and unregistered investments, like the case of EurexTrade, it is not registered in Botswana. Registration is important because it provides investors with access to key information about the company's management, products, services, finances and regulations. As in the case of EurexTrade, investors went through difficulty to receive payments or cash out from the investment where some ended up losing everything. Pyramid schemes not only injure consumers. In many cases, they affect the daily operations of banks, stock exchanges and other legitimate financial institutions and promote their own programme as a superior alternative to traditional banking and investment.