Skip to content

Is cryptocurrency, i.e. Bitcoin, a Ponzi scheme?

In the comments to Cryptos – waiting for the bids… super elite notes:

A Brief History of Ponzi

Charles Ponzi became famous as a result of the mania he created in 1920 in the midst of the post World War depression. His scheme involved convincing the public that he had a profitable business (arbitraging price differentials in International Reply Coupons, or IRCs). But the market for IRCs was too tiny to plausibly support the many millions of profit that Charles Ponzi claimed to be making, so suspicions grew and his scheme collapsed. He started with nearly nothing, made millions, lost the faith of his investors, and finally pled guilty all in the same year.

The stock market mania in the 1920’s then led to the Great Depression, and in the 1930’s a chain letter craze swept across the US.

The first MLM scheme was invented right after we nearly destroyed the entire world in 1945. Using the concept of the endless chain and the pyramid structure, Nutrilite (bought by Amway in 1972) saw explosive growth in 1945, growing from $2000 in revenues to millions. Using the sale of vitamins as a cover, Amway to this day is primarily a recruiting scheme. New recruits must pay money to the company. They are paid by finding additional recruits to join the company. By the 1960’s these pyramid schemes had grown so large and complaints became so common that lawmakers came very close to making these schemes a federal crime. But the bill failed to pass both the House and the Senate, so the Federal Trade Commission took over the handling of complaints. The FTC only handles civil cases rather than criminal cases. By the 1970’s the FTC shut down Amway’s two largest competitors. However, Amway’s leadership had strong political connections, enabling them to pressure the FTC to look the other way. The case was made that Amway is selling products. Therefore, it is not a scam. Around 1980, Amway began using a new term for schemes involving endless chains and pyramids. They called it Multi-Level Marketing to legitimize and differentiate themselves from virtually identical business models that had been shut down. A central theme to MLMs is the belief in some variation of The Law of Attraction. If you think positively you will be successful; if you lose money with MLMs the problem must be that you are too negative.

One of the greatest bubbles in history was the dot com boom. Right around the bottom of the dot com crash, in 2003, Chris Moneymaker made history when he won the World Series of Poker. What was remarkable about him was not his unusual last name, but the fact that he was the first to qualify for the tournament on an online poker website. He was perceived as an average Joe who decided to go for it, and he inspired the masses to follow in his footsteps as he showed that anyone could do this. Over the next several years, interest in poker exploded. You could go online and make easy money with poker because the average player was not very sophisticated. Of course, they were all weeded out over the years, and today, only highly skilled players can make any money consistently. While poker isn’t generally considered to be a Ponzi game, it briefly became one during the Moneymaker era, as easy money could be made due to the large number of new entrants eager to part with their hard-earned cash.

The US housing bubble and subsequent GFC led to the collapse of Madoff’s Ponzi.

Years before Bernie Madoff’s Ponzi collapsed in 2008, whistleblower Harry Markopolos warned the SEC about Madoff, but was ignored. The Ponzi wasn’t exposed until people tried to get their money back during the financial crisis. Around this time, Bitcoin, the biggest Ponzi-like scheme of all time was invented. Just like in an MLM such as Herbalife, the money that’s made heavily relies on new entrants entering the game. On, since about 6 months, ago, new bitcoin and crypto related groups are popping up every week. On, you can see that crypto has consistently been the hottest topic this year. There are reports now that half of all crypto investors entered within the last year. Crypto’s growth is the result of a highly effective marketing machine. Browse through any comments section of an economics or finance related Youtube video, and you’ll find it’s littered with posts that market cryptos. In order to appear near the top, the comments appear along with numerous fake replies and fake upvotes.

We have not yet reached the stage where people come to the realization that cryptos are a modified version of the game of poker. They way you make money is by being a better trader, while all the money comes from other traders playing the game, while the house takes its cut through transaction fees and selling tokens that cost nothing to create. Clearly, as crypto matures, the only possible outcome is a community of highly competitive traders who are always on the lookout for new marks, so they can make easy money. In other words, it’s a game of poker.

What astonishes me is the nonsense merchants talking about how new and revolutionary crypto-coin is. Anything which requires enormous energy to create meaningless numbers is basically digital macrame. The people pouring money into cryptocurrency remind me of the Indians accepting glass beads as precious stones.

Those beads were worth something, until they were worth nothing again.

Image: Casino Bratislava by Eugen Bernath for the film

Leave a Reply

Your email address will not be published. Required fields are marked *