What is a Ponzi scheme primarily characterized by?

A Ponzi scheme is primarily characterized by the use of funds from new investors to pay returns to earlier investors, creating the illusion of a profitable business. This fraudulent investment strategy relies on the continuous recruitment of new participants to provide returns to earlier investors, effectively masking its unsustainable nature. The scheme will collapse when it becomes difficult to attract enough new investors to pay returns to earlier ones, leading to significant financial loss for those involved.

In contrast, a legitimate investment with guaranteed returns is not characteristic of a Ponzi scheme, as legitimate investments typically carry a degree of risk and do not guarantee outcomes. Additionally, insurance fraud involves manipulating or misrepresenting facts related to insurance policies for personal gain, which is distinct from the mechanics of a Ponzi scheme. Lastly, a scheme that is fully transparent to investors would not be classified as a Ponzi scheme, as these schemes typically operate under a veil of deception, hiding their true nature from investors.