Bitcoin as a Ponzi Scheme

I keep hearing claims from various souces that Bitcoin is a ponzi scheme. People claiming that clearly have no notion what a ponzi scheme actually is.

A ponzi scheme is one in investments are sought for a security that may or may not exist. The returns paid or promised for that security are above the actual market performance of the security. (Obviously, for a non-existent security, any rate of return would be above the market performance.) Early investors are paid out from the proceeds of selling shares to new investors. A “security” in this case could be anything from a company to a real estate deal.

As long as the amount being withdrawn or paid to investors is less than the amount being brought in by new investments, the ponzi scheme does not collapse. However, once payouts exceed new investments, the scheme rapidly collapses. The purveyor of the scheme will usually be long gone by this time, having taken his cut for brokering each transaction, or even having stolen the remaining assets in the scheme before it inverts and collapses, thus hastening the collapse.

It should be noted that in a good ponzi scheme, the early investors will, in fact, receive the promised return. This is critical to obtaining the word of mouth references that entice new investors in.

Bitcoin, on the other hand, does not qualify as a ponzi scheme. If Bitcoin is a ponzi scheme, then so is gold, oil, and frozen concentrated orange juice. The reason for this is that all four items trade on open markets. That’s right. If you happen to have a bitcoin, you can only sell it for what someone is willing to pay you. The same is true for an ounce of gold, a barrel of oil, or a pound of frozen concentrated orange juice.

I should point out that while Bitcoin or any other commodity or currency is not a ponzi scheme, that does not prevent someone from operating a ponzi scheme using Bitcoins (or oil or gold). However, just like in the case of gold or oil or US dollars, someone operating a ponzi scheme denominated in Bitcoins does not make Bitcoins themselves a ponzi scheme.

To make a long answer short, Bitcoin itself is not a ponzi scheme. It is merely a commodity (or currency, depending on your perspective) that trades on open markets with a free-floating price. You can buy at any time and sell at any time. The key is to deal with a reputable trader with proper infrastructure and security precautions. Just like you can make bad investments with US dollars, you can make bad investments with Bitcoins. Just like you can put your US dollars in a bank that fails due to fraud or incompetence, you can entrust your Bitcoins to a shady or incompetent operator.

Also, you should realize that just like any other free-floating price, it can be manipulated by legitimate and not-s0-legitimate means. There are no guaranteed returns. If anyone tells you that you can “get rich quick”, run away, whether it is Bitcoin or something else. Sure, early investors in Bitcoin are potentially sitting on massive Bitcoin wealth. But just because someone bought low (or at zero in the case of “mining”), it doesn’t mean it is a ponzi scheme. There is nothing stopping you from risking an amount of your currency of choice attempting to buy low and sell high even today, just like countless people are doing with gold, oil, frozen concentrated orange juice, or any other commodity or currency!

I can suggest a Bitcoin exchange that seems to be trustworthy if you wish to convert between Bitcoins and CAD. Check out CAVirtEx. They seem to have their ducks lined up and they take great pains to make sure they know what is going on. They also have fairly solid market depth. They are run by real people, are a real corporation, and have registered with the relevant authorities for providing fincancial services. While none of that guarantees they will suffer a similar fate to other exchanges, it does put them on a fairly solid footing.

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