Those who ask, “is Forex a Ponzi scheme?”, they don’t know what Forex and Ponzi scheme are. They just know that Forex makes money, and Ponzi is bad and illegal. However, they want to make money with Forex, but they are afraid that if Forex is a Ponzi scheme, then they may legally get into trouble if they trade Forex. Please spend a few minutes and read this short article, if you want to become enlightened about all these things:
What Is Forex?
I have explained about Forex in detail in one of my other articles: What Is Forex and How Do Forex Traders Make Money?
Forex is trading or buying/selling currencies against each other. It makes money when you buy low and sell high, or sell high and buy low. For example, you buy Euro against USD, and then Euro’s value goes up against USD. Therefore, if you sell Euro against USD at that level, you will make profit.
It means in Forex, you deal with currencies and their prices. Of course, you deal with Forex brokers too because when you want to trade Forex, you must open an account with a Forex broker, which is like a bank. Forex brokers connect you and your computer to the Forex market.
What Is a Ponzi Scheme?
Ponzi scheme has a completely different story. Ponzi schemes pay high amounts of profits for investments. For example, they pay 20% profit per month, while banks offer a 1-2% profit per year. They pretend that they invest the investors’ capitals in highly profitable projects that return lots of profit, and that’s why they are able to pay lots of profit to the investors. However, this is a big lie because there is no project that can return so much profit, within a short time and every month. In fact, they take money from new investors, and pay profit to old ones.
Most investors know that there is no project or investment that can return so much profit. However, they still invest with Ponzi schemes because their greed pushes them to do so.
Ponzi schemes are all illegal because they are built based on lie and cheating. All of them will collapse eventually because if most of their investors decide to withdraw their capitals, the Ponzi scheme doesn’t have enough money for them, and so all investors will find out that they have been scammed and their capitals are gone.
Now that you know what Forex and Ponzi scheme are, you can answer the question below very easily. However, still there is something that I must explain after answering this question:
Is Forex a Ponzi Scheme?
No, it is not. As you learned above, “Forex” has nothing to do with Ponzi scheme. However, the way that some market maker Forex brokers act, they can be known as Ponzi schemes.
Market maker brokers don’t connect you to the real, worldwide and global Forex market. They are the market themselves. It means you buy and sell currencies with them and in their pocket, not in the Forex market. Therefore, your loss is their profit and your profit is their loss. If you make profit in a trade, they will have to pay you the profit because you have traded in their pocket, not in the Forex market. So it makes sense that they don’t want you to win. Your winning positions don’t make them happy. If they see that you are making profit consistently, they must do something to make you lose, or make you withdraw your money, close your account and leave as soon as possible and before you impose lots of losses to them.
However, they are not always successful in making their clients lose money, or making their winning clients close their accounts and leave. Sometimes, a huge and strong movement that most traders take, makes them lose a lot of money. For example, in the bitcoin’s recent upward movement, if most traders took a long position (they bought), they could easily make their market makers bankrupt. I have seen that some of these brokers have blocked and banned trading bitcoin and they don’t even update the bitcoin’s price chart on their platforms, since bitcoin has started going up like crazy recently. This exactly proves that they don’t want people to make profit, whereas ECN/STP brokers are not like this because they connect you to the real worldwide and global Forex market and they don’t care whether you lose or win. They just charge you some fees to handle your orders.
Now the question is, what should a market maker broker that has been trapped by some winning traders do?
They have only two choices. They either have to close the brokerage and disappear, not to pay the traders gains, or they must take money from their new clients and give it to the old ones who want to withdraw their profits. That is the moment that a Forex broker turns into a Ponzi scheme.
Even by turning into a Ponzi scheme, market maker Forex brokers who owe lots of money to their clients cannot survive because they cannot attract enough number of new clients who deposit enough money to their accounts. So they won’t be able to pay the money they have lost to traders.
The lesson you learn from this tragedy is that you must avoid market maker brokers. Although you can never get legally involved in a Ponzi scheme if you trade Forex because Forex has nothing to do with Ponzi, still you can be scammed by market marker brokers who act like a Ponzi scheme. You will lose your capital to these brokers. So all you need to do to protect yourself is that you always open a live account with the regulated ECT/STP brokers. That’s all.