No, Bitcoin is NOT a Ponzi scheme.
You can legitimately be skeptical of Bitcoin. But if you call it a Ponzi, you don’t know what a Ponzi is.
Let me be clear from the beginning: with this article, I don’t want to convince anyone to buy Bitcoin. I sincerely don’t care.
It just pains me to see people calling it ‘a Ponzi’. Not because of my love for Bitcoin, but because it reveals how some people don’t understand what Ponzi schemes are. And if you don’t understand them, you may fall for one. Financial literacy matters.
So, what is a Ponzi scheme?
A Ponzi scheme is a fraud. In simple terms, you enter an ‘investment’ that promises you a very high return on your capital.
The only problem is that your capital is not invested and there was never an investment in the first place. Your capital is kept in cash and returns are literally made up. If you ask to cash out part of your money (or even all of it), that money is simply coming from newcomers into the Ponzi scheme.
As long as not too many people try to cash out at the same time, the scheme is ‘sustainable’.
The main beneficiary of a Ponzi scheme is whoever creates it and somehow convinces other to ‘invest’. They can use the money in the scheme to finance their (lavish) lifestyle and / or siphon it off for a rainy day (which tends to inevitably come when the scheme collapses). Early ‘investors’ can also benefit from a Ponzi, as long as they cash out entirely before the end.
The most famous and extensive Ponzi scheme of all times was that of Bernie Madoff. It lasted for more than 40 years and only collapsed as a result of the Great Financial Crisis of 2008 / 2009. Madoff didn’t sell to the man on the street. He literally scammed the most well connected people in the USA and Europe. Perhaps that is why he got several centuries in jail.
Bitcoin is not a fraud – no matter hot much you hate it
You can legitimately hate Bitcoin for whatever reason, but it is a fact Bitcoin is not a fraud. Why?
- Nobody ‘forces’ you to enter an investment in Bitcoin by promising you sure returns.
- In any fraud, there is a fraudster. But there is no central entity that regulates how much Bitcoin is issued and that can benefit from you entering an investment.
- Bitcoin is extremely transparent – without getting into technicalities, it is built on a technology which allows anyone to know exactly how much Bitcoin there is/will be, where is it and where is being moved to/from.
Some point out that those who hold Bitcoin do benefit from you entering an investment in it (by virtue of the price going up if there is demand for Bitcoin).
This is true, but that’s also not a fraud. It is exactly the same mechanic of a home surging up in value because there is demand for nearby homes. Or gold going up in value because there is demand for gold (sounds familiar?).
Bitcoin may be a greater’s fool game, but so may be your home
What some people call ‘a greater’s fool game’, is simply a game of supply and demand: the more demand (or less supply) of a thing there is, the more the thing goes up in price.
Surprise, surprise, that is exactly how the price of anything is determined in our society: by supply meeting demand.
Your home is subject exactly to the same dynamic: it is only worth as much as the next person is willing to spend for it.
But wait! My home CAN BE LIVED IN IT! It is USEFUL! Bitcoin isn’t!
– You, probably
Yes, a house is what investors call a yield-generating asset. It generates a yield in the form of the rent you can get from it or save on, by living in it.
That doesn’t mean your home is not subject to the law of supply and demand. Ever heard of NIMBYsm? What is the ‘fair’ price of homes in today’s day and age? It we were to extrapolate it from the rent people can expect from it, would a small studio in NYC or Geneva in a semi decent area cost $ 1+ Million?
The truth is that the housing market is subject to a whole lot of speculation, exactly as everything else. That coms in the form of regulations that don’t allow for new homes to be built, homeowners lobbying for limiting the supply of new homes and also simple and plain greed-driven purchases by homebuyers (whether people or institutions). Remember the Great Financial Crisis? Go watch ‘The Big Short’ if you didn’t already.
If we were to deregulate completely construction (remember, supply + demand), what would happen to the price of your home? Yep. It would collapse. Chances are that you are against building new housing in your area if you are a homeowner. Congrats, you are a speculator!
Bitcoin is digital gold – a high risk bet, not for everyone
Anyone telling you to invest huge amounts of your money into #Bitcoin is, for lack of a better word, an idi*t. The same applies to people suggesting to invest in any cryptocurrency that is not Bitcoin, or that promise you they found ‘the next Bitcoin’.
Bitcoin is the equivalent of gold in the digital space. A very scarce, easy to transport and incorruptible asset. Those are its technical characteristics (maybe I’ll write about them next time). It is far smaller than gold in terms of market capitalization (how big it is as an asset) because it is less mature and relatively new.
Today, it remains a speculative bet. Exactly how some tech stocks or high-end apartments in LA are. The bet is that it can be adopted by enough people and institutions to grow to the same size of gold (which, today, is approximately 10–12 times larger than Bitcoin) or more.
Is it a safe bet? Not at all. After all there is no asset on Earth that can provide you with a high return with limited risk.
And that’s why you should probably not go all-in Bitcoin. Or even put much money into it. Whether or not Bitcoin’s adoption as a global reserve asset (held by central banks, pension funds, investment funds, etc.) will grow is anyone’s guess.
I don’t like the expression ‘put only how much you can afford to lose’ either, because I am a firm believer you should only invest in what you understand and what you think has potential. Nobody should ever invest on pure speculation without having an own investment thesis.
So, do what you want. Don’t buy Bitcoin. Or buy it. But at least stop calling it a Ponzi scheme or a fraud, because it is not more of a fraud than your home is.
