Introduction.

Did you ever wonder how an HYIP really works?  As the experienced investor knows, most HYIPs are simply games (Please see HYIP Insights #4 for our thoughts on this).  They survive for a while and then they fade into the sunset.  Most are “Ponzi’s” named in honor of Charles Ponzi, a gentleman who, in the 1920’s, offered people in the US huge returns on their investments with him.  It turned out that he was using the deposits of recent investors to pay the returns due to older ones.  That’s how a “Ponzi Scheme” works.  Ultimately, it HAS TO fail.  Most HYIPs are in this category and that’s why we consider them to be games; your goal is to break even with them and maybe even come out ahead — ideally WAY ahead — before they ultimately close.  Of course, we always hope for the true online investment company to come along that is able to offer high returns based on income from a legitimate business.  Sadly, such companies are few and far between…

The best point of view IS to treat all this as a game.  And, if you want to win at a game, you should understand how it works.  One way to get this understanding is to look at a specific numerical example.

Let’s talk about an investment plan that pays you 3% interest per day for 60 days.  If you divide 100% by 3%, you find that such a plan would break even in 34 days.  In our reviews of investment plans, we also determine average daily net interest, or DNI.  For this plan, the total gross interest is 3% times 60 days or 180%.  Assuming that this includes a person’s investment, the total net interest would be 80%.  Finally, dividing this by the 60-day length of the plan, you get a DNI of 1.33%.  In our reviews, we would typically suggest that such a program might be able to sustain net interest payments at this level.  This would be one of the BETTER investment plans that we encounter.  But, is it really a sustainable investment plan?  How do the actual numbers work out?  What will happen if this program is, indeed, a Ponzi with absolutely no outside source of revenue?

There are obviously an infinite number of scenarios that could take place for an investment plan such as this.  Different investors will deposit different amounts of money into the plan and investors will enter the plan at different periods of time.   The case that we will consider here is very simple to understand.  We will assume that one new investor signs up for the program every day and that he invests $100.  Then we will imagine that we are the Admin of the program and will take a look at how much money is in the balance of our bank account at the end of each day.  My hope is that this will point out a few important characteristics of how the typical Ponzi-based HYIP works.  This, in turn, might enable you to play our game a bit smarter that you have been playing it in the past.

The Numbers.

Following is a chart that gives a day by day analysis of this imaginary record of the program Admin.  The first column is the number of the day.  I’ve let the analysis go on for 75 days.  The second column is the total number of investors in the plan.  You can see that every day, the number of investors increases by one until Day 60.  That’s when the term of the investment plan ends (for the first investor).  So, every day after that, while there is still a new person signing up for the plan, but there is also a person leaving the plan.  Thus, the number of investors in the plan remains the same after that.  Sixty.

Now, let’s look at the third column, the “$ IN” column.  This is the money that investors put into the plan.  This is very easy to understand since every day a new person signs up and invests $100.  So, the bank account gains $100 every day.  Next, look at the “$ OUT” column.  This is the money that the plan pays out to its investors.  Every day our company must pay 3% (or $3) to each of its investors.  So, at the end of Day 1, $3 is paid to the first investor.  Likewise, at the end of Day 2, $3 must be paid to each of the two investors — a total of $6.  Similarly, on Day 3, $9 would be paid out, and so on.  Always $3 per day per investor.  So, as time goes on, the amount in the “$ OUT” column increases until Day 60 when the number of investors is constant.  From Day 60 on, the amount paid out remains constant at $180.

The important column is the “BALANCE” column.  This is the amount of money in the Admin’s bank account at the end of every day.  It’s easy to see where these numbers come from.  At the end of Day 1, you must subtract $3 from the $100 deposit to get a balance of $97.  This is the starting point for Day 2.  For Day 2, you add another $100 but you must subtract $6 (the amount in the “$ OUT” column) to get a new balance of $191.  The balance continues to increase as the days go by.  However, you will notice that it increases more slowly as time goes on due to the fact that the amount of money being paid out is increasing.  The balance reaches a maximum after around 34 days.  This is when the first investor will break even.  After that, the program starts to lose money because it is paying out more than it is taking in.  And, this gets worse every day as more and more investors break even and start to make “pure profit.”  Even after 60 days when investors will be leaving the program, the program will still have to pay out more than it takes in.  So, the balance will continue to decrease until it finally goes to zero.

Well, if this were a real-life scenario, the Admin would close the program long before the balance goes to zero.  Perhaps he might have closed it near the 34-day mark when he saw that the balance is starting to decrease…

OK, this is a very very simplified example.  In reality, both the size of deposits and frequency of deposits will vary.  But, still, there are a number of things that can be learned from this:

  1. If an HYIP has no outside source of income, it will definitely close.
  2. It is wise to invest with an HYIP as soon as possible after it opens.
  3. The longer you stay with an HYIP, the higher the risk of it closing becomes. So, you should probably NOT REinvest in an HYIP.
  4. Programs with break-even points that are relatively short are probably best. A month or so might be a reasonable limit.

All of these factors are discussed in HYIP Insights #21 (you can read it here).  Now you can see some numbers in support of our recommendations in that article.

I hope this information is helpful.

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HOW AN HYIP WORKS
Case #1 
One New Investor Every Day
Investment Amount = $100
Program Pays 3%/day for 60 Days
Break even in 34 days
DNI = 1.33%
Day # Investors $ IN $ OUT BALANCE
1 1 $100 $3 $97
2 2 $100 $6 $99
3 3 $100 $9 $190
4 4 $100 $12 $278
5 5 $100 $15 $363
6 6 $100 $18 $445
7 7 $100 $21 $524
8 8 $100 $24 $600
9 9 $100 $27 $673
10 10 $100 $30 $743
11 11 $100 $33 $810
12 12 $100 $36 $874
13 13 $100 $39 $935
14 14 $100 $42 $993
15 15 $100 $45 $1,048
16 16 $100 $48 $1,100
17 17 $100 $51 $1,149
18 18 $100 $54 $1,195
19 19 $100 $57 $1,238
20 20 $100 $60 $1,278
21 21 $100 $63 $1,315
22 22 $100 $66 $1,349
23 23 $100 $69 $1,380
24 24 $100 $72 $1,408
25 25 $100 $75 $1,433
26 26 $100 $78 $1,455
27 27 $100 $81 $1,474
28 28 $100 $84 $1,490
29 29 $100 $87 $1,503
30 30 $100 $90 $1,513
31 31 $100 $93 $1,520
32 32 $100 $96 $1,524
33 33 $100 $99 $1,525
34 34 $100 $102 $1,523
35 35 $100 $105 $1,518
36 36 $100 $108 $1,510
37 37 $100 $111 $1,499
38 38 $100 $114 $1,485
39 39 $100 $117 $1,468
40 40 $100 $120 $1,448
41 41 $100 $123 $1,425
42 42 $100 $126 $1,399
43 43 $100 $129 $1,370
44 44 $100 $132 $1,338
45 45 $100 $135 $1,303
46 46 $100 $138 $1,265
47 47 $100 $141 $1,224
48 48 $100 $144 $1,180
49 49 $100 $147 $1,133
50 50 $100 $150 $1,083
51 51 $100 $153 $1,030
52 52 $100 $156 $974
53 53 $100 $159 $915
54 54 $100 $162 $853
55 55 $100 $165 $788
56 56 $100 $168 $720
57 57 $100 $171 $649
58 58 $100 $174 $575
59 59 $100 $177 $498
60 60 $100 $180 $418
61 60 $100 $180 $338
62 60 $100 $180 $258
63 60 $100 $180 $178
64 60 $100 $180 $98
65 60 $100 $180 $18
66 60 $100 $180 -$62
67 60 $100 $180 -$142
68 60 $100 $180 -$222
69 60 $100 $180 -$302
70 60 $100 $180 -$382
71 60 $100 $180 -$462
72 60 $100 $180 -$542
73 60 $100 $180 -$622
74 60 $100 $180 -$702
75 60 $100 $180 -$782

 

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