A Ponzi scheme is a long-standing scam that uses money from the pockets of new investors “Reward” early investors.

The most famous of these scams is the Madoff Ponzi scheme. In short, Bernard L. Madoff attracted a steady stream of new investors by providing stable returns that were well above the market average. At the same time, Madoff claimed that the solid returns came from his "insider information," when in fact he was simply paying dividends to early investors using the principal of new investors. This model persisted on Wall Street for a long time because the dividends paid were not large compared to the principal. It wasn't until one day when an investor demanded redemption of a large amount of principal that he became insolvent that the scam was finally exposed.

In the encryption market, Ponzi schemes are also common. The most notorious of these is LUNA (now LUNC), which caused shock throughout the market in May 2022.