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Cryptocurrency Is A Ponzi Scheme?

The concept that cryptocurrency is a Ponzi Scheme has been argued by opponents of cryptocurrency since bitcoin’s explosive bull run of 2018. That was when cryptocurrencies first became popular, catching the attention of government’s and prominent investors. What did they say about it? Nothing good!

Perhaps the most successful investor Warren Buffet famously said about bitcoin that it is [1] “rat poison squared.” As he sees it people who invest in cryptocurrencies are only speculating; gambling with the hope that they will find someone else to sell it to.

This post is not to agree or disagree; it will only put the facts on paper.

Cryptocurrency As A Ponzi Scheme

The argument as to whether cryptocurrency is a Ponzi scheme can be put in another way: is crypto a means of exchange or a store of value? In order words, do people buy crypto because they want something with which they can buy the things they need, or do they buy it because they want to get more money?

Pause there for a second. Let us now explain what a Ponzi scheme is.

What Is A Ponzi Scheme?

A Ponzi scheme is a program that promises huge rewards to investors. It generates the money to pay old investors through payments received from new investors. Ponzi schemes are also called pyramid schemes, and their major identifying mark is the fact that they constantly need to recruit new investors to keep the scam going.

Going for how long? It varies. One example, the Caritas Scheme ran from 1991 to 1994 (3 years), MMM ran from 1989 to 1994 (5 years), and it later reopened as MMM Global which lasted from 2011 to 2017 (6 years.) perhaps the most noteworthy example of a long lasting Ponzi scheme is Petters Group Worldwide which ran in the USA for 13 years.

It is important to note that Ponzi Schemes are not always intended by the founders to be Ponzi Schemes, they may actually start as genuine investment programs or trading companies. Along the line however, they may find it easier to simply pay old investors from monies received from new investors.

Now let us go back to the issue of whether cryptocurrency is a Ponzi scheme. So as to maintain a neutral stand point, arguments will be made for and against the supposition.

Arguments For

Crypto could be a Ponzi Scheme for the following reasons:

Even the best cryptocurrencies seem to be sustained by the willingness of people to buy RAPIDLY. When buying pressure is not sustained, prices tend to drop dramatically, leading to the violent volatility often witnessed in crypto.

Cryptocurrency has still not established itself as a means of exchange or as currency. Yes, it is accepted here and there, but that is not how to define a currency. A currency is a means of exchange first. That means even though it can be a store of value, it is its previous use as a currency-as a store of value- that makes it so.

With cryptocurrency it seems that the opposite is the case. People only buy because they hope they can sell at a higher price. It needs new investors to keep the scheme going, hence the resemblance to Ponzi schemes.

The horse should come before the cart. Use as a means of exchange should come store of value. Otherwise one would be storing something with no value.

Perhaps the biggest reason why crypto is a pyramid scheme is shitcoins. They litter the cryptoverse for no reason other than greed. They are basically pump and dump scams taking money from new investors to pay old ones.

Those are some arguments for crypto as a Ponzi scheme. Now let us consider arguments against crypto as a Ponzi.

Arguments Against

Deflationary Assets like bitcoin present a completely new dynamic to finance. Due to predefined processes like halving and burning ensure that instead of diminishing in value (as paper money generally does) many crypto currencies will actually see value gains.

Theoretically, that means even if people do not keep up the mad rush for the assets, these crypto will still increase in price.

The paragraph above said “these crypto.” There are only a few crypto that meet this specific requirement, some of them are Bitcoin, Ethereum, and Binance Coin.

Adoption in Commerce seems to be on the increase. In some countries, bitcoin is already legal tender; meaning that it has been integrated into the economy. Other countries have not made such declarations, but they also do not oppose the use of crypto for commerce.

Widespread acceptance among people all over the world is the reason why crypto has become the sensation it is today. It was this widespread acceptance that got the governments and institutional investors to notice crypto, and that caused notable figures like Warren Buffet to make the statement quoted in the introduction.

Finally, everyone knows that Ponzi Schemes need to have someone in the background who controls and administers it. The keyword as to why this does not apply to crypto is “decentralized.” Yes, some crypto coins are decentralized, meaning that the US dollar (and the FED) look more like Ponzi schemes than they do.

Further Reading:

Closing

Is crypto a Ponzi scheme? That is a question that every individual will have to decide for himself based on his principles and convictions. Crypto is a risk, and must be treated as such.

However, it must also be noted that every investment is a risk, and there is always the possibility of losing one’s deposit. It with this in mind that many investors have adopted the mindset of investing only what they “can afford to lose.”

References:

[1] Buffet Bashes Bitcoin As Thriving on Mystique| Reuters| 7 May, 2018. Cited 28 October 2023.

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