A pyramid scheme is a scam in which
… requires an endless stream of recruits for success. Recruits (a) give money to recruiters and (b) enlist fresh recruits to give them money. These schemes are characterized by the promise of sky-high returns in a short period of time for doing nothing other than handing over your money and getting others to do the same.
Most pyramid schemes try to hide the fact that they are, in fact, pyramid schemes in order to deceive participants. But given that pyramid schemes are still relatively common, especially in their quasi-legal mutation as multi-level marketing schemes, is there a way to leverage a pyramid scheme to make money off of it?
In March 2012 the BBC reported on research suggesting that some investors were intentionally putting money into pyramid schemes that they knew were fraudulent as a short term investing strategy. These investors supposedly used websites to datamine information about specific pyramid schemes to determine the optimal time to invest and withdraw money.
Dr [Richard] Clayton said the study uncovered aggregator or “tracker” sites that monitored the Ponzi schemes, some of which lasted for months. The trackers detail the returns the different schemes were paying out.
The first Ponzi schemes were set up by Boston fraudster Charles Ponzi in the 1920s.
Using these sites investors spot when they start to crumble and make efforts to recover their initial investment.
“Their only purpose is to help people choose where they can put their money,” said Dr Clayton, though he was cautious of drawing any strong conclusions given the lack of corroborating evidence.
“If we believe that what we see on the net is true, then some people get money back and some get more back than they invested,” he said.
Of course, if I were running a Ponzi scheme, I might want to set up such an aggregator specifically to deceive someone thinking of using such a strategy.
The full text of the paper by Clayton and his co-authors Tyler Moore and Jie Han is available as a PDF file: The Postmodern Ponzi Scheme: Empirical Analysis of High-Yield Investment Programs.