The Greatest Lie on Earth: “Bitcoin is a Ponzi Scheme”
It's a little less P.T. Barnum and a little more ridiculous. But even after over a decade of being in the periphery and dead centre of the iris that is the public eye, there are still more than a fair number of people who are wholly insistent that any material gains (noticeably) earned by people through Bitcoin is just more of a demonstration that it is, in fact, some kind of Ponzi scheme.
Well, Epicurus put forward one of the first working scientific theories for the true shape of the world, but there are still those (ironically) using the internet to profess that THAT'S wrong, so where's the surprise, really?
But with any kind of prevailing myth, no matter how aggressively we rail against it. The only true remedy is to address it and, like an intangible balloon: briskly poke holes in it. So that's what we're setting out to do here.
There won't be any need for extensive literary knowledge of Bitcoin, cryptocurrencies in general or blockchain; this is an article wholly for the public of which has been keeping a watch of Bitcoin to varying degrees.
Bitcoin – And the Never-Ending Ponzi Scheme Myth
The best thing to do for the start of this is to address what we mean when we use the definition of something as a ‘Ponzi Scheme.' Firstly, it's safe to say that it should be treated as a derogatory descriptor since it implies that its fraudulent to some extent.
But what is it? Ultimately, what it is is a pyramid scheme. For example, the person at the top, or people, get the ball rolling with their ‘incredible product X, Y, or Z' and advertise that they're looking for investors to buy in too. The more people they can advertise and sell it to, these schemers will likely advertise, the more of a return on investment you can make.
These investors then attract more investors, and so on and so on. Just how long this continues is dependent on how long these schemers and investors can keep the momentum going for, with each layer skimming money off the layers below them.
Inevitably, this investment momentum can't persist forever and a pyramid/Ponzi scheme will collapse, allowing the top tiers to make off with a lot of money, while lower layers come out at a serious loss.
Ok, so with the context of what a Ponzi Scheme is exactly taken care of, we will now go into just why Bitcoin does not conform to anything close to the characteristics we see from these schemes. Along with this, we sincerely hope that you will become one of the more clued up investors out there that can not only rip apart derogatory claims of something being a scam, while also being able to tell what out there IS.
Less Pyramids and More Democratic – Bitcoin is no Ponzi
Anyone that is well versed in just how Bitcoin and the technology ‘underneath' it functions will know that it certainly doesn't operate in a Pyramid-like structure; there is no advert out there telling you to invite people in and promising you massive returns on your and their investments.
Whenever you buy or sell Bitcoin, there is no need to find people in order to take them off your hands or sell them to you. Nor are there BTC sellers out there that will give you them in exchange for a percentage of your future gains.
Just like trading anything physical, it operates as an exchange; you can use a coin exchange online, or a dedicated kind of ATM. You pay for it in Fiat and you now own Bitcoin, no strings attached.
If ever curiousity strikes you and you find yourself wanting to find out more from people about crypto, or if you want to speak to people about it, all you ever really need to do is explain to them some of the core components of blockchain. Like the fact that it stores information in a long sequence of blocks, and does so very securely and how Bitcoin works into that and why the latter will be a future asset class or currency to contend with.
While it's not my place right now to question what exactly will come of Bitcoin in the foreseeable future, what the focus is on is the fact that this asset doesn't see people asking for money in return for people getting involved in investing. People already involved in the Bitcoin market don't suddenly ask for Bitcoin percentages in return for new people entering the market.
As a result of these factors, there is no great pressure on you, as an investor, at any time to sell your Bitcoin. The crypto that you buy and hold on to is not something that directly benefits investors allegedly ‘above' you. Instead, it indirectly improves the investments of those investors ‘around' you thanks to the raised profile that BTC attains from more investors.
Another attribute that sets Bitcoin apart from any kind of Ponzi scheme is the fact that it is easily purchased from a wide range of cryptocurrency exchanges online. These exchanges also offer some level of security and safeguarding against the propagation of pyramid schemes.
Instead of buying into a sometimes thinly veiled or blurred kind of Ponzi scheme, when people buy into Bitcoin, they get into trading a really innovative digital asset and technology, by extension.
Bitcoin's ‘Cognitive' Pyramid
While there is no Ponzi-style mechanic in place for Bitcoin. It can be argued that there is some kind of intellectual structure within Bitcoin that can be regarded as a ‘Pyramid.' Satoshi Nakamoto had created a king of an intellectual pyramid from which knowledge of Bitcoin and its technology trickled down.
But to suggest that this is akin to a Ponzi scheme would ultimately be ridiculous; these people who learned about Bitcoin didn't just buy into it for some kind of material pay-off. Instead, they read the white paper, and became engrossed in it as an innovative solution to the (at the time) current economic crisis of 2008/9.
None of these people have ever asked for some kind of dividend off any Bitcoin that was sold as a result of them bringing in other people. In reality, those that got involved in Bitcoin at the very beginning were either uncaring of the kind of material value it possessed and more enamored by its potential, or the worst kind of Ponzi-related marketers.
And considering the fact that there was a Pyramid-like trickle-down effect coming from these people from the outset of Bitcoin's creation, the question is this – is there something wrong with that? If you truly believe in the innovative potential of a product, isn't that something that you're more likely to introduce people to?
You have the same thing with a particular kind of mobile phone brand, or internet service provider – you get a highly positive experience, see the potential for it in the hands of people you know and care for and let them know about it. We commonly refer to this as a kind of network effect; when we let people know about something that we believe in, it's not to do with getting some kind of share of the money. Bitcoin is exactly that – it's a technology that we effectively believe in.
What is the ultimate conclusion that we can take away from this analysis so far? The first and more prominent of these is the fact that those who refer to Bitcoin as some kind of Ponzi scheme are not only ignorant of the Crypto's mechanics, but also completely lacking in knowledge of what a Pyramid scheme is.
So even though Bitcoin simply does not fit into the mould of a Ponzi scheme, why then is there this persistence on the part of people to continually compare Bitcoin to a Ponzi scheme? The reality is that there have been a number of Ponzi Schemes that have used Bitcoin as a way to capitalize on the latter's popularity to elevate their fraudulent products.
These very same Ponzi schemes find themselves easily finding a ‘free lunch' on the fact that transferring money using it, along with the fact that it is challenging to trace transactions that involved Bitcoin.
When thought of in simpler terms, there is a lot of enthusiasm that these Ponzi Schemes tap into, which allows them to easily encourage people to send money to otherwise unverified individuals and their crypto addresses (with some or even many of these same users promising to give back double the amount that they sent).
What makes these kinds of Ponzi schemes, or scams for lack of a better term, is the fact that these transactions involve no kind of intermediaries and no substantial evidence which can be used as evidence within a court of law. Bitcoin, or money in another iteration, is sent over, allowing for a continued flow of ‘interest' (which is not interest, technically, but are just more Bitcoin which is added to the pyramid by the newest entrants into the scheme) is meted out.
Of course, those that have since been deceived and brought into the fold are more than welcome, and encouraged to bring in acolytes, who will consequently bring in more money, thereby sending their BTC quota ever upwards. But, much like any Ponzi scheme, momentum simply cannot be carried on forever, and will culminate in some kind of burst bubble, with winners at the top receiving a large volume of BTC, while those at the bottom are subject to almost crippling losses.
Each of these schemes come with an initial ‘desired' amount set out from the very beginning. But these amounts are rarely ever attained by these schemers, but that hardly matters when a large number of users end up coming into the Pyramid, bringing a huge sum of money regardless.
The issue is that the Ponzi schemes that are built on the underlying qualities of Bitcoin are not something that Bitcoin itself should be blamed for. It is merely the fact that these schemers decided to take advantage of the popularity of Bitcoin.
For example, there have been plenty of Ponzi schemes out there that have taken place for a long time all around the world, all of which involved an investment of fiat and promised payouts in the same. While this is the case, why isn't there more scorn placed on the Dollar, Euro or Pound Sterling in light of this?
For Bitcoin, having attributes like non-traceability and highly efficient transaction speed are exceptional qualities that it boasts, not flaws and grounds to dismiss it as some kind of scam. Bitcoin at its core, is a version 2.0 of fiat currencies, allowing for a far greater degree of privacy along with more efficiency in how fast these transactions can take place internationally. And these are just two of the qualities that it possesses.
One of the most important factors is that Ponzi schemes must use its own means as well as the means of its community to carry on before inevitably collapsing. Bitcoin, by contrast, is only one of these means, same thing goes with fiat currencies. As a result of this, Bitcoin itself is not some kind of Ponzi scheme. What it is is a technology which allows for a highly defined value for its information units. All thanks to the guarantee of a limited number of units thanks to the fact that it is something that cannot be duplicated.
Cryptocurrencies – The Good and the Evil They Represent
Bitcoin, much like any kind of technology or currency, can be used in a wholly honest or dishonest way, for good or for evil intentions. Largely due to the fact that, unlike any kind of centralized entity, it is a wholly objective digital asset class. Bitcoin is not responsible for how others decide to use it, it's just the latest iteration and next generation of money.
Ink can be used to write the next generation of Shakespeare or to write the next Mein Kampf. The fault doesn't derive from the ink or the pen that contains it, the fault comes from the person that is putting it to use.
The actions of people are what inevitably drive things to be affixed a certain moral standpoint, and this is something that technologies and currencies of all kinds are certainly not immune to. Bitcoin itself is certainly no virtual demon to be cautioned against, much to the chagrin of those that ignorantly continue to believe.