Bitcoin is often referred to as a Ponzi scheme by those who form their opinions from newspaper headlines. In order to correct these fallacies, we’ve put together a quick guide to what a Ponzi scheme is (thanks to Investopedia) and why Bitcoin isn’t one.
“A Ponzi scheme is an investment fraud where clients are promised a large profit at little to no risk.”
Firstly, Bitcoin is a traded asset, not a form of investment. Secondly, the only people you will find promising large profits at no risk are scammers, like the PayCoin founder. Almost everyone else cries from the rooftops to explain just how uncertain and volatile cryptocurrency is and how caution should be used when buying it. Any Bitcoin fan who says it’s risk-free are either lying or insane.
“Companies that engage in a Ponzi scheme focus all of their energy into attracting new clients to make investments.”
Bitcoin started out being a completely valueless gamble by a small group of people who actively tried to keep it quiet for many years. Most Bitcoin owners, especially the early ones, had no idea what it might be worth in the future and saw it as an interesting concept. The fact that very little new money came in through the early years had no impact on the project.
“This new income is used to pay original investors their returns, marked as a profit from a legitimate transaction.”
If you buy Bitcoin you can sell it whenever you want and put the profits back into your bank account. There is no original investor to pay – that was you.
“Ponzi schemes rely on a constant flow of new investments to continue to provide returns to older investors. When this flow runs out, the scheme falls apart.”
2018 saw hundreds of billions of dollars leave the space, yet private equity funds, public pension funds, and banks are getting involved. That’s hardly falling apart.
Blockchains Aren’t Built on Pyramids
There are many other reasons as to why Bitcoin can’t be considered a pyramid or Ponzi scheme, but these are some of the more obvious ones. Over time those who ignore these arguments will hopefully either educate themselves or realize that institutions such as Yale University, Morgan Creek, and Fidelity might have done their homework before investing in it. Don’t hold your breath though.