Sometimes I’m too hasty with my conclusions. This morning I tweeted: “so bitcoin is a (slow) ponzi scheme, well surprise surprise!”. This based on the article BitCoin, Pyramid Schemes and Alternate Currencies on The Refined Geek. After my tweet I immediately got comments from nzBTC.com claiming my conclusion is wrong.
Truth being told, I think I know quite a lot about Ponzi Schemes and can spot a scam from quite far but I’m no expert on Bitcoin so I guess had to do some research to learn more to see if I would stick to my initial conclusion.
For those of you who don’t know what a Bitcoin is, in short it’s a digital (crypto-)currency created by Satoshi Nakamoto, which is actually not his real name. Some say it’s not even one person, others say it’s these guys based on a patent registration:
Neal King (he also goes by Neal J. King from Munich, Germany) is listed on a number of patent applications, notably “UPDATING AND DISTRIBUTING ENCRYPTION KEYS” (#20100042841) and “CONTENTION ACCESS TO A COMMUNICATION MEDIUM IN A COMMUNICATIONS NETWORK” (#20090196306), both of which seem Bitcoin-y to me.
Besides being digital, the big and in my opinion disruptive difference with any other non-digital currency is that it’s not governed by a bank, a country or any other institute. It’s sort of a true, almost idealistic, community currency. Here’s a short nice presentation for people new to what bitcoin is.
Bitcoin is quite a complex system in all aspects, so check the video below for a more simple explanation. This quite clearly explains a lot of aspects of Bitcoin which in a sense are true, but I will argue the conclusion that it’s a Ponzi scheme.
Selling “nothing” for “something”
One of the arguments used in the video above is that the people who started Bitcoin created something without intrinsic value to then “market” or “pump” the product so it becomes worth something. The old “Pump and Dump” strategy which we’ve seen more than once used by investors in “sexy” companies.
Sure, of course Bitcoin had and still has no intrinsic value, but that applies to any other paper currency as well. The times that every dollar was backed by silver are long gone. Simple economics: something is worth as much as someone else wants to pay for it. Does this make Bitcoin a Ponzi scheme? No, at worst it could make the buyers of bitcoins fools for attaching any value to Bitcoin.
Money, lots of money has been made in the top
True, no denying that the people who started this project by now made a shit load of money, meaning dollars. Just so you know, bitcoins are traded for cold hard (traditional) money on decentralised exchange markets like MT.GOX and Bitcoin-24. Since the starters gained already 6 mln bitcoins before the project was officially launched , only those assets represent a current value of € 658,202,520 and for sure they “mined” much more bitcoins after the Bitcoin was officially launched.
Fuck, this must be a Ponzi, right? Well, technically no. Though I gotta say that this was why at first I was really strong on my opinion that it is a Ponzi scheme. What you can argue is that it’s not really ethical to take so much of the table yourself when launching a “community” open-source digital currency. But in a Ponzi Scheme returns are promised (and faked) in exchange for an investment. Well, in this case, if you’re buying bitcoins you’re buying it from another bitcoin user and you’re buying it because you need them or because YOU think you can make money on speculating with bitcoins.
No investment was asked besides crunching heavy calculations which costs hardware and electricity to accommodate the system. The reward for that was bitcoins which in the start had hardly any value and no one promised that it would have the high value it has now.
The early adoptors made the bitcoin possible and invested in some serious hardware for “mining” which is essential to the existence of the system. Without any upside for the early adopters why would they have bothered in the first place?
The thing that bitcoin has in common with MLM (Multi Level Marketing) is that the “founder(s)” and early adopters make the most money. Which then again can be counter argued that the bitcoin has experienced a crash down to $0.01 which at that moment threw the market wide open for newcomers to make loads of money.
Anyway, a lot of money has been made in the top, but that doesn’t make it a Ponzi Scheme. And to be honest, if the bitcoin keeps surviving and growing I argue it’s fair that the founder(s) make(s) (a lot of) money. Mark Zuckerberg made a fortune with a (perhaps stolen) idea that in my opinion has much less impact on the world than a new digital currency will have once it become widely adopted.
The Bitcoin System Will Collapse
Another argument is that the system will inevitably collapse. Well sure, I don’t rule that out. But the same can be said about other (paper) currency. As you’ve noticed Europe isn’t doing all that well and this directly affects the value of it’s currency, the euro. One can also argue that the US deficit has spiraled completely out of control which inevitably will results in the collapse of the dollar.
Truth is, the value of a currency is derived from the amount of trust it enjoys. If tomorrow we all collectively come to the conclusion that the euro is worth squad, well, that’s exactly what the value will be then. The same goes for the bitcoin, if no one is buying or accepting it than the value will drop until someone start buying or accepting it again.
The new, the intriguing and confusing thing about the bitcoin is that it’s hard to determine what actually is responsible for the value. Sure, it’s trust but based on what? Maybe that’s exactly what can make the bitcoin stronger than any other currency. Its value is not depending on the economic situation of one specific country or group of countries. There are no interventions, no bailouts, no skimming bankaccounts, it’s the currency of the people, even though it’s just a few still. Where one might argue that the $ is safer because it’s “backed” by the US, someone else can argue that that’s exactly why the $ is less safe than bitcoin.
Another reason that’s being given for the collapse of this currency is that it’s getting harder and more expensive to mine new bitcoins and in the end there are no more bitcoins to be mined. From bitcoin perspective the assumption is that by then the system is fully “developed” and self-sustainable.
Bitcoin itself says that the project is “experimental’ and it warns people to not spend any money on it that they can’t afford to lose. To be honest, that’s more than any other state/currency does.
Ok, a shitload of money has been made at the top by the founder(s) and early adopters. This makes this currency itself a business as well, in the most direct definition. But this doesn’t make it a Ponzi scheme, it makes it a moral and ethical discussion which I would like to pass on. In my opinion the founders are some of the most intelligent, smart and ambitious and already successful people in the world, good for them.
Will people lose all their money? Well, that depends on those same people and luckily for bitcoin it doesn’t depend on governments and greedy bank directors. Though, like any market, also the bitcoin market will be and probably already is being manipulated. But that goes for any market.
Bitcoin for me is an intriguing project/currency which itself in the end might fail but chances are the thought behind it will survive. Considering Spain has been rumored to have exchanged a lot of euros into bitcoins you might even conclude bitcoin at the moment is more trusted than the euro.
So Ponzi? No, since no investments are asked. At the worst it can be labeled as a “Pump and Dump” operation.
Is it criminal? Based on current legislation it’s not. As usual with digital developments the law comes after the fact.
Ethical? Sure, while we’re at it let’s discuss the ethics of some of the most established financial institutes in the world.
Sustainable? Voltaire once said “Paper money eventually returns to its intrinsic value —- zero.” If Voltaire was right the same might apply to bitcoin. Bitcoin is a currency, the compensation model is designed to keep the system growing until it’s sustainable. Whether it will stand the test of time is a matter of market forces and the trust people put into the currency. You tell me. The biggest risk I see now is that “the establishments” forces bitcoin to shutdown because it might not fit into their perception or personal interests.