Granted, bitcoin shares some similarities with pyramid schemes, but when studied a little further, the paths diverge considerably. Pyramid schemes are old investment frauds wherein existing investors are required to bring in new investors, and the new investors repeat the process.
At the top of the pyramid is the founder of the scheme, he is the biggest earner since he gets a percentage of all the investments below him. The people at the bottom of the pyramid generally lose money because they put their money at the end of the cycle, when there are no more fools to invest.
Generally, early birds tend to cash in before the scheme goes burst. That is one similarity between a pyramid scheme and bitcoin; people who invested in bitcoin in 2012 probably bought 1 bitcoin for $13. Just look at the price today. Those people are rich!
So How Is Bitcoin Not A Pyramid Scheme?
Well, first, bitcoin was not created as a speculative asset. It was created as a digital means of exchange, and also as a store of value. Satoshi Nakamoto probably never intended for bitcoin to sell at $60,000.
Even if he did, then he probably didn’t mean for it to get to that price so quickly. Bitcoin is a deflationary asset, which means it is supposed to rise gradually, as the halvings occur.
So What Happened?
A frenzy happened. Sometimes when people spot a genuine investment opportunity, they get interested, and so they throw in a lot of money. When all goes well and they make a profit, they tell their friends about it over a few beers.
Their friends jump in, and quickly make money too. As good friends, they tell other friends, and then those too grab a piece of the pie. With such an influx of money, that asset will go up, thus reinforcing the opinion that it was a good investment!
Before long, that asset gets a mention on TV, and then more people get interested.
Things escalate quickly after that; the financial term for such a situation is “a bubble.” They call it a bubble because by then, the price of the asset is blown out of proportion- completely out of touch with reality.
People soon realize this fact, and though they may continue to buy the asset hoping that they find another fool to sell to at a higher price, it soon reaches a stage where nobody is willing to buy anymore.
Realizing that new fools are scarce, the original investors start to cash in. Then what happens?
The Bubble Bursts
It doesn’t pop gently, it does so violently, and terribly. Prices crash rapidly, and people see their investments wiped out in a matter of moments. This has already happened with bitcoin.
On October 22, 2021 Bitcoin reached a new all-time high of $66,974, by December that same year, it had fallen to $47,686. That was a spectacular drop of 30% in less than 3 months.
In fact, bitcoin’s drop did not stop there; it was only the beginning of a bear market that continued well into 2023. On January 1 2023, bitcoin was worth $16,542. From an all-time high of $66,974 to a price of $16,542, millions of dollars had been lost, and many investors were ruined.
So how is that not a pyramid scheme?
When Pyramid Schemes go burst, they burst into oblivion. When bubbles burst they burst back to their fair price, or intrinsic value.
Therefore the evidence shows that bitcoin is not a pyramid scheme but a bubble. There is nothing illegal about bubbles, they happen all the time. The tulip mania, the dot com bubble, the housing bubble (2004-2007) are all examples of economic bubbles.
Bitcoin’s survival proves without a doubt that it is a real asset, and that it has come to stay. Its behavior is akin to stocks, although its volatility is certainly more extreme.
Calling bitcoin a pyramid scheme is therefore akin to calling the stock market a pyramid scheme. Interestingly, there are people who say that it is.
Bitcoin Is Very Volatile
Bitcoin is a very volatile asset; price changes within 24 hour periods can differ greatly. It is for this reason that extra care must be taken before investing in this asset. Furthermore, bitcoin has established itself as trading between cycles of booms and crashes.
These booms and crashes can reverse suddenly, leading to quick gains or quick losses. During booms it is normal to hear words like “bitcoin is going to the moon,” and during crashes it is common to hear “bitcoin is dead.”
None of the above is true. Bitcoin is not going to the moon, and neither is it dying. Those are gross exaggerations that foster greed and fear respectively, and which are peddled by novices in the world of investing.
To avoid the noise, many have adopted a long term approach to investing in bitcoin; they just buy and forget about it. While it will take away the stress, it may not necessarily be profitable. All investments are risky.
Should I buy Bitcoin?
That is a question that no advisor worth his salt will answer with a straight yes or no. The best thing anyone can say is that it is wiser to invest only what one can afford to lose. It is goes badly, one should not be too shaken. If on the other hand, it goes as well as predicted by some quarters, then a small investment in bitcoin should be enough to make one rich.
Are There Other Coins Like Bitcoin?
There is a whole cryptoverse out there, and one is welcome to cautiously browse through. However, the chances of finding a unicorn in the vast sea of dead horses is quite small; the cryptoverse has been flooded by an uncountable number of useless coins, many of which are nothing but catchy names coined by pump and dump scammers trying to get money out of novices.
They all say the same thing; “it is too late to invest in bitcoin now. Therefore invest in this coin, and in a few years you will be rich.”
Rinse and repeat, they continue to say the same thing, duping people over and over again with different coins.
As for the question: how is bitcoin not a pyramid scheme? The answer remains that it is not a pyramid scheme because it has survived several bursts. While pyramid schemes require new members to bring more people, bitcoin has no such requirement.
Bitcoin is a tradable asset that became wildly popular because it is a revolutionary piece of technology. The popularity is why the price has gone up. It may continue to go up for the foreseeable future.