Although the critics of Bitcoin don’t bring up this accusation as much as they did in the early days of cryptocurrencies, there are still a few people out there who believe that the digital currency is nothing more than a Ponzi scheme. These naysayers see the price of bitcoins continue to rise over the years, and they feel that new people must continue to come into the Bitcoin ecosystem if early adopters are going to be able to get a return on their initial investments. The Ponzi scheme crowd is actually quite similar to the “tulip mania 2.0” crowd who use hyperbole to denounce Bitcoin and claim that it has no chance of longevity. To understand whether or not Bitcoin is a Ponzi scheme, we need to take a closer look at the true definition of this unique form of financial fraud.
What is a Ponzi Scheme?
In short, a Ponzi scheme is a form of financial fraud where a centralized entity takes on investors and then pays those early investors returns from a new influx of investors who come into the scheme at a later date. Most Ponzi schemes offer unrealistic returns for investors until there are no new investors who can be duped into putting their money into the scheme. One of the most notorious examples of this type of investment fraud was recently pulled off by Bernie Madoff. His investment company was exposed as a Ponzi scheme after the financial collapse of 2008 when many of his clients felt like it was time to pull their money out of the Madoff fund. This form of financial fraud is named after Charles Ponzi who was notorious for pulling off these kinds of schemes back in the 1920s.
Does This Argument Apply to Bitcoin?
Now that we understand the definition of a Ponzi scheme, we should be able to decide whether or not the name should be applied to Bitcoin. The first thing that should be noticed when it comes to Bitcoin as a Ponzi scheme is that there is no Charles Ponzi or Bernie Madoff involved with Bitcoin. In traditional Ponzi schemes, there is an initial collector of funds who promises great returns without much explanation as to what is being done with the client’s money. With Bitcoin, there is no central entity that controls Bitcoin or touts it to new people on a daily basis. The support for Bitcoin was created in a completely organic manner, and there is no individual making investments on behalf of the entire Bitcoin community. Each person is purchasing bitcoins on their own accord, and there isn’t some organization or person controlling all of the money.
In addition to there being no Ponzi behind Bitcoin, there is also no scheme. In a Ponzi scheme, the idea is that you always need new money to pay off old investors. Contrary to the way things work in a Ponzi scheme, there is no need for new investors in Bitcoin. If the number of people speculating on the price of Bitcoin stagnates, then the price will simply remain around the relatively same level without crashing down to zero. There are no payouts that need to be made to Bitcoin holders on a regular basis, so there is no way for a scheme to be exposed.
Is Every Form of Money a Ponzi Scheme?
One last point that needs to be made when it comes to Ponzi schemes and Bitcoin is how this argument could also be applied to every other form of money that has ever existed. Whether you’re talking about gold or cigarettes, every form of money has seen an increase in value as more people decide to accept it for payments. Would the people who say Bitcoin is a Ponzi scheme also say that the 4,000 years in which gold and silver were considered money was also nothing more than a form of financial fraud? It should also be mentioned that the US dollar only has value due to the fact that it was once redeemable for gold many years ago. If Bitcoin critics want to call the digital currency a Ponzi scheme, then they should also think about the form of money they use on a daily basis and whether or not it could also collapse tomorrow.