Ponzi Scheme - Unraveling of A Ponzi Scheme

Unraveling of A Ponzi Scheme

When a Ponzi scheme is not stopped by the authorities, it sooner or later falls apart for one of the following reasons:

1. The promoter vanishes, taking all the remaining investment money (minus payouts to investors already made).
2. Since the scheme requires a continual stream of investments to fund higher returns, once investment slows down, the scheme collapses as the promoter starts having problems paying the promised returns (the higher the returns, the greater the risk of the Ponzi scheme collapsing). Such liquidity crises often trigger panics, as more people start asking for their money, similar to a bank run.
3. External market forces, such as a sharp decline in the economy (for example, the Madoff investment scandal during the market downturn of 2008), cause many investors to withdraw part or all of their funds.