Is Bitcoin a Ponzi Scheme?

Last night 60 Minutes ran a piece on the ‘crypto currency’ Auscoin, essentially revealing it to be scam.  That of course has mainstream media yet again today tarring all cryptos with the same scam brush.  Now don’t get us wrong, there are plenty of scam coins and tokens out there and you need to be careful, but to call all crypto a scam is plain ignorant.  

An oft repeated and fundamentally wrong description is Ponzi Scheme.  Indeed a popular AM radio station this morning in Brisbane was on the Ponzi Scheme bandwagon in reference to last night’s story, and again generalising it to all crypto and of course, in ultimate ignorance, generalising all crypto to Bitcoin.  They then crossed to a professor in Economics who started to explain and legitimise crypto currencies and explain why it wasn’t a Ponzi Scheme.  It clearly wasn’t the interview they were after and they cut it off due to a ‘bad phone connection’…  So let’s remind ourselves what a Ponzi Scheme is:

“A Ponzi scheme is a fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns for older investors by acquiring new investors. This is similar to a pyramid scheme in that both are based on using new investors’ funds to pay the earlier backers. For both Ponzi schemes and pyramid schemes, eventually there isn’t enough money to go around, and the schemes unravel.”?—?Investopedia

So let’s boil this down for the headliner of Bitcoin (but it applies equally to other large cap stores of value like Litecoin etc):

  • Bitcoin promises no return and indeed can’t deliver a yield or non-capital gain return.  The whitepaper (a condensed PDS if you like) talks simply of the technology to facilitate a peer to peer payment system and secure store of value.  No mention of an investment  making money, indeed no mention of price at all.
  • Bitcoin is one of the most open and transparent technologies or monetary platforms in the world.  You can see the source code, anyone can own it, and every transaction ever is visible for anyone to see.
  • No one person or few ‘controlling persons’ benefit from its use nor control it.  There is no intermediary and no scheme manager(s), simply holders exchanging value directly, peer to peer.
  • Bitcoin is a free market where participants independently can buy, hold or sell it 
  • The value in bitcoin is by virtue of economics 101 – supply and demand.
  • In terms of ‘enough to go around’, well there is the supply side of the equation right there.  With a total market cap right now of $183 billion and indeed the total market cap for al cryptos at $494b, that is laughably minor in the scheme of things.  Gold has a market cap around $7 trillion.  Of the c180,000 tonne of gold inexistence, you can buy a 1g bar for around $80.  Of the 16.9m Bitcoin in existence (and 21m max ever) 1 satoshi (the smallest unit and 8th decimal place of one bitcoin) is worth $0.0001

Ellery Davies is the Co-chair of the Cryptocurrency Standards Association.  He puts it nicely:

“Is a Picasso painting a pyramid scheme? (as far as it is considered by some to be an investment or an item of value).

Of course, a Picasso painting would make a very poor payment instrument or currency. It is not portable, fungible or divisible. It is easily forged and difficult to verify in the field. It is large and requires a carefully controlled environment. But there are things that Bitcoin has in common with a painting by any famous, dead artist:

  1. It is highly sought by a community of collectors.
  2. The supply is known and capped. All originals are catalogued. Once they are all found and circulating, there can never be any more.
  3. It has achieved a fluid, two sided network. It has recognition and demand in all corners of the earth.
  4. Multiple exchanges track and report value as it changes hands. You can collect Bitcoin (or Picasso), but you cannot fool exchanges & collectors by operating an arbitrage scheme.

Unlike gold, Bitcoin is a construct of pure math. But exactly like gold and Picasso paintings, its value is driven by pure supply and demand. It is nothing like a pyramid scheme.

Bitcoin represents a completely level and fair playing field, because the economics of adoption and growth cannot be controlled by anyone. Math is eternal. It is certainly a lot more durable and trustworthy than governments. Bitcoin is the future of money. Yet, governments needn’t fear it. Gradually, governments are recognizing that widespread use of cryptocurrency presents a far bigger opportunity than a threat.”