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Bitcoin, and cryptocurrencies in general, face a lot of criticism. One of the most enduring and repeated criticisms of Bitcoin is that it lacks value and resembles a massive ponzi or pyramid scheme. However, this claim—like many anti-Bitcoin claims—is simply false, an attempt at discrediting the fast-moving cryptocurrency revolution.
Of course, the Bitcoin community is no stranger from exaggerated and outrightly false statements designed to stoke fear, uncertainty, and doubt (FUD). However, the bitcoin-is-a-ponzi-scheme argument has so many weaknesses, it'd make a house of cards look stable.
Before anything, let's define a ponzi scheme. For accuracy, we'll use the definition provided by the US Securities and Exchange Commission:
"A ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors. Ponzi scheme organizers often promise to invest your money and generate high returns with little or no risk. But in many Ponzi schemes, the fraudsters do not invest the money. Instead, they use it to pay those who invested earlier and may keep some for themselves."
The SEC further adds: "With no legitimate earnings, Ponzi schemes require a constant flow of money to survive. When it becomes hard to recruit new investors, or when large numbers of existing investors cash out, these schemes tend to collapse."
With that crash course on Ponzi schemes, we'll evaluate how Bitcoin stacks up to Ponzi schemes by comparing their features.
First, Bitcoin never promises investors risk-free returns. Satoshi Nakamoto, the anonymous individual(s) behind Bitcoin, rarely mentioned consistent investment returns in their online communication. In fact, Satoshi clearly described Bitcoin as a commodity, saying it wasn't a stock designed to generate ROI.
Further to the point, Bitcoin has always been a high-volatility and high-risk asset. After hitting a record $60,000 valuation in November last year, Bitcoin's value has dropped below $40,000 in 2022. While Bitcoin may provide higher long-term returns, short-term growth often varies wildly between flat and negative.
Ponzi schemes sell fictitious, unregistered assets to unsuspecting investors. However, Bitcoin is a recognised asset in many countries, including the US, where gains on cryptocurrencies are subject to capital gains tax.
The organizers of a Ponzi scheme often skip registration procedures, which limits their paper trail and scuttles investigations. In contrast, cryptocurrency exchanges are registered in their respective countries, with many requiring users to comply with Know-Your-Customer (KYC) and Anti Money Laundering (AML) regulations.
Anyone who has ever invested in a Ponzi scheme knows the secrecy which shrouds the internal workings of the system. Of course, obfuscating investors is necessary for Ponzi backers—who'd deliberately leave money in a scheme doomed to fail?
Thankfully, Bitcoin doesn't share the cloak-and-daggers nature of Ponzi schemes. The Bitcoin blockchain is permissionless, so anyone can join the network and see transactions as they happen. Moreover, the decentralization inherent in the blockchain prevents any party from secretly tampering with records for malicious purposes.
Another point used to defend the "Bitcoin is a Ponzi scheme" argument is that earliest investors gain more compared to new entrants. However, this is not the 'gotcha' that Bitcoin detractors think it is. Yes, Bitcoin's value may have increased, benefitting those who bought early—but it doesn't mean buying early guarantees outsized returns.
Consider this: someone who bought Bitcoin at $60,000 in November will have made a 40% loss on their original investment based on the current value of 1 BTC ($36,000). Ponzi schemes rarely ever promise losses; if anything, people are encouraged to invest early to increase their returns.
The SEC also lists "difficulty receiving payments" as a major characteristic of Ponzi schemes. Since the scheme is likely to crash if multiple investors withdraw simultaneously, Ponzi runners may prevent withdrawals or offer incentives to continue investing.
With changes to the system, Bitcoin has become more liquid than ever. Investors can withdraw Bitcoin from a wallet in minutes or convert it to fiat currency via the dozens of exchanges operating across the world. If you can withdraw Bitcoin whenever you wish, is it still a Ponzi scheme?
A classic hallmark of Ponzi schemes is the use of dodgy paperwork to deceive investors. Bernie Madoff, the man who brought pyramid investments into the 21st century, would issue fake documents granting suckers ownership of non-existent assets.
With Bitcoin, everything is out in the open; ownership and transfer is easily verifiable via the public blockchain. The average Joe can download Bitcoin's open-source software on a home computer and verify the validity of a transaction.
It is also important to compare the evolution of Bitcoin against Ponzi schemes to see if similarities exist. Many Ponzi schemes are highly centralized, pyramid-like systems where a few investors earn the lion's share of returns at the expense of others. Bitcoin has evolved into a decentralized system that operates on the consensus of every participant on the network. Nobody, not even Satoshi Nakamoto, can manipulate the allocation of returns to their benefit.
We should also note that Satoshi could have acquired an unfair earning advantage if they wanted. Before their disappearance, Satoshi mined more than a million Bitcoins when a unit cost less than a pizza. At current market prices, Satoshi's stash is worth $36,000,000,000, yet there's no sign they plan to cash in. Beyond the few coins transferred to test the system (including those sent to Hal Finney), most of the coins in Satoshi's original wallet have never moved.
Now, compare Satoshi Nakamoto to famous Ponzi kingpins like Bernie Madoff. One set up a system because they genuinely believed in the value of a trustless financial system. Another created a system that constantly made him more money while unaware investors lost thousands of dollars.
Anti-Bitcoiners would have you believe Bitcoin has "zero intrinsic value" and needs newer investors to continue functioning. However, even this claim flies in the face of evidence.
Fiat currencies and commodities have value because we collectively bestow value on them. Paper money would be worthless if humans didn't agree to use it as a means of exchanging value.
Bitcoin has value because many people agree to use it as a currency. Like any currency, Bitcoin is portable, fungible, and limited in supply. Some may even argue that Bitcoin is a better currency than fiat currency because of the anonymity, ease of transactions, and security it provides.
In spite of these facts, you can expect people like self-avowed "crypto skeptic" Paul Krugman to use "Bitcoin" and "Ponzi scheme" in the same sentence. But hey, wasn't that the man who predicted the Internet's effect on the world's economy would be no more than that of fax machines?
That cryptocurrencies like Bitcoin aren't Ponzi schemes doesn't mean they cannot be used to perpetrate pyramid schemes. The same features that enhance crypto—anonymity, fast payments, and censorship resistance—make it the perfect tool of choice for Ponzi scammers. For context, billions of dollars have been lost to various crypto Ponzi scams.
However, that's not the fault of the technology. Ponzi schemes work off of the same principles; the means used to execute them just changes. Virtually every fiat currency and commodity can be used for Ponzis, so Bitcoin isn't the black sheep here.
In the end, people will believe what they want to believe. As such, what matters is that we know Bitcoin (and cryptocurrency) is not a Ponzi scheme. Rather, it represents the future; a future where people can transact seamlessly across the world, without relying on middlemen or losing money to inflation.
Author Bio
Emmanuel Awosika is a freelance tech writer covering blockchain technology and cryptocurrencies. He runs Businesstechguides.co, a platform for analyzing the latest trends in the crypto and blockchain industry.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.