Is bitcoin a scam?
Is bitcoin one humongous scam or Ponzi scheme? Before I answer that question, let’s look at the four typical characteristics of a Ponzi scheme.
First of all, there must be a promoter for the scheme. It may be a single individual or a corporation.
The key point here is that there is a single party promoting (and thus benefiting from) the scheme. The second characteristic is the promised return.
To attract gullible investors the scheme will promise unrealistic sky-high returns. The saying “if it is too good to be true, it probably is” always applies in this scenario.
The third characteristic pertains to the investment’s liquidity, which simply means how easy it is to get out once you are in. The promoter will tend to discourage investors from cashing out using and will do so using one or more of these three approaches.
The stick approach is where the investor loses a portion of his investment if he withdraws early.
Conversely the carrot approach entices the investor to stay in by promising even higher returns the longer he keeps the funds invested.
Finally the “too-good-not-to-share” approach requires the investor to find a new investor to take over his investment. In short, he needs to look for new fools to buy him out.
Yes, the Ponzi scheme’s liquidity is at the mercy of the promoter’s whim and fancy.
Thus we come to the fourth characteristic. Ponzi schemes require a constant flow of new investors (read: new money) to fund the payout to early investors.
Before the promoter vanishes into thin air, a small number of EARLY investors DO actually get to cash out and enjoy the ridiculous returns. This is done intentionally by the promoter to “instill” confidence in the scheme as these early investors will help to bring in new investors.
Let’s apply these four characteristics to Bitcoin. The decentralised nature of bitcoin means that there is never a single party promoting bitcoin.
One may argue that there are plenty of people promoting the virtues of bitcoin.
However these are all unrelated parties, akin to different investment advisers promoting the virtues of gold as an investment.