Friday, February 23, 2018

Is Bitcoin a Ponzi Scheme?

How many times have we heard Bitcoin and scam used in the same sentence?

That question comes up often when hanging out with the non-techie or what they call the “normie” crowd.  Anytime people I do not know well, or not at all, hear me talking to others about crypto, that is the #1 question.  If I only had a dollar (Ethereum preferred actually) for every time I have had to answer that, well…. I would have many extra dollars.

Let me start by saying that many people do not actually know what a ponzi scheme is.  I figured that one out quite quick.  Those that do know what a ponzi scheme is, and still ask the question, have absolutely no idea of how crypto works nor should they enter the market without proper research.

The definition of Ponzi is “fraud in which belief in the success of a nonexistent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors.” The name “Ponzi” comes from an Italian businessman who created a scheme that did exactly that. While Ponzi pulled this off in the first half of the last Century, he certainly was not the first. Records back into the 1800’s report the same type of investment scams, Ponzi was just the guy who ended up having a scam named after himself, most likely to the detriment of family who have had to live with their last name, from that point on.

In order to have a Ponzi scheme, you must have 2 things, investors and a central agent handling the money. While Bitcoin and Ethereum may have investors (buyers actually), they most certainly lack a central authority handling the money. Bitcoin, Ethereum and many other cryptocurrencies are decentralized in nature. Decentralization makes it impossible to be a Ponzi as there is no central authority that controls the money. Add to that a public ledger that allows everyone and anyone to track money movements, the Ponzi argument doesn’t have much traction.

The problem may be a lack of understanding. Those screaming Ponzi normally do not understand financial markets in general, much less a finance market based on hard to understand technological ideas such as data structures, distributed ledgers, decentralized networks and cryptography.

Anyone who came across this page because they were looking for the answer to “Is Bitcoin a Ponzi scheme,” may not actually be ready for cryptocurrency. Crypto is a highly volatile, speculative asset, that requires not just a financial investment, but an investment of time as well. There are 1000’s of cryptocurrencies at the moment and navigating the list of available crypto assets requires research and due diligence.

Far too many people have sunk money into poor projects over nothing more than some cool looking Youtube videos, celebrity tweets and “to the moon” FB posts. Some months back I saw a viral video about crypto investing. The video had been shared 1000’s and 1000’s of times and it starred a teen girl who was giving financial advice and describing how she tripled her money in 2 weeks. It is mind blowing as to how many people were willing to take financial investment advise from a random 17 year old on Youtube. More mind boggling that she claimed she invested a few hundred bucks, only. Point is that type of content diminishes the legitimacy of the industry and creates an environment were folks completely unqualified to invest in anything, end up investing in something they don’t understand. When they lose money on that investment, having taken advice from people not qualified to flip burgers much less offer insight into high tech finance markets, they lash out at all crypto and dismiss the entire market as nothing more than a scam.

For anyone starting in crypto, the first step is research. No one should ever buy any asset without doing the research to understand what it is that they are buying. Traditional markets force the issue by preventing unqualified investors from investing into speculative, high risk start-ups, directly. Investors must go through brokerages that offer their own restrictions. The crypto market has none of that. Crypto markets allow everyone to buy whatever they want directly off exchanges or peer to peer and that requires research.

Have there been crypto ponzi schemes? Of course. Crypto is an asset that can be traded for cash. Ponzis may be created in any form of payment. Crypto just requires an extra step of exchange to cash out. For scammers planning their next gig, I doubt the extra 30 second step of cashing out is an issue. Ponzi schemes exist in any method of payment but Bitcoin, Ethereum and other cryptocurrencies are not responsible for the actions of scammers just as the USD system is not responsible for Bernie Madoff’s actions.

For folks that are still wondering whether Bitcoin is a Ponzi scheme, please do not take my word, or anyone’s word to the contrary. Do your own research as that should be what any investor’s decision should be based on.