Bitcoins: The Second Biggest Ponzi Scheme in History
J Thoendell stashed this in Cryptocurrency
The individual who sells the Ponzi scheme makes money by siphoning off a large share of the money coming in. In other words, he does not make the investment. But Bitcoins are unique. The money was siphoned off from the beginning. Somebody owned a good percentage of the original digits. Then, by telling his story, this individual created demand for all of the digits. The dollar-value of his share of the Bitcoins appreciates with the other digits.
The most important point: Bitcoins are NOT money:
Now let us look at bitcoins. The market value of one bitcoin has gone from about $2 to $1,000 in a year. This is not money. This commodity is not being bought for its services as money. It is unpredictable to a fault.
Admittedly, those who got in early on this Ponzi scheme are doing very well. They will probably continue to do well for a time. As more people hear about this investment, which is justified in terms of its future potential as money, more people will buy it. Late-comers are not buying it because they understand its potential as future money, any more than the late investors in Charles Ponzi's scheme thought they were buying into the arbitrage potential of foreign postage stamps. They are buying Bitcoins because we are in the midst of a Ponzi scheme mania. They will continue to buy because they think this time it's different.
This digital so-called money will not be used to facilitate exchange. Nobody is going to be getting rid of an asset that has moved from $2 to $1,000 in one year in order to buy pizzas. People want to hang onto it, refusing to sell, in the hopes that it will go to $2,000. This is the classic mark of Ponzi scheme psychology.People do not buy the investment for the benefits that the investment provides as an investment, in other words, because it is a capital asset. They buy it only because it has gone up in price. They expect this to continue.
See for example Kevin Rose's recent remarks on Bitcoin:
I was wondering what the author thought was the biggest Ponzi scheme in history:
I hereby make a prediction: Bitcoins will go down in history as the most spectacular private Ponzi scheme in history. It will dwarf anything dreamed of by Bernard Madoff. (It will never rival Social Security, however.)
Ah, the government is big enough to create a bigger Ponzi scheme.
can you say "Dutch Tulip Bubble" - haven't read the article yet, but no article on bubbles and ponzi schemes should gloss over that event
Yes, that market had the same properties.
The market looks great until there are not enough buyers, and then everything falls apart.
The article is worth reading:
I need a better automatic bozo filter for unimaginative luddites who keep making short-term, dumb arguments about digital currencies. These chimps are the modern equivalent of people who said that a network that based on unreliable protocols couldn't work. Or that computer languages based on virtual machines could never scale. Get out of the way; we've got cool stuff to do.
Why does a new currency need to be invented?
Why can't programmable currency systems use dollars like PayPal, Square, Stripe, and many others do?
Well, they could. And in fact, people have built them. But nobody wanted to use such a system because it required that someone be trusted. If Joe Blonk launched a cool, dollar-based payment system, you needed to trust Joe Blonk not to run off with your dollars.
The alternative is to build something on top of Banking (with a capital B)...as does PayPal, Square, etc. And thus, you inherit the legacy of payment instruments that were not designed to support the features that PayPal et al are trying to provide. This creates a slew of costs and friction and confusion and other garble and generally impedes innovation.
Look, if the Federal Reserve would provide a payment platform that enabled nearly-free, irreversible, instant-settlement electronic payments in dollars, I'd lose a lot of my enthusiasm for digital currencies. Don't bet that's going to happen.
Bitcoin needs to be in its own currency because you can't get distributed trust without it, and distributed trust is why Bitcoin has an actual prayer of adoption when all of the digital gold and other non-fiat-based systems starting from the 1990s couldn't get adoption.
That makes sense.
If the Federal Reserve cannot provide a payment platform with nearly-free, irreversible, instant-settlement electronics payments, perhaps a company can.
That platform seems like it would be independent of Bitcoin -- or Litecoin, or any of the other currencies vying for viability.
You can't just build a payment platform in dollars that has those properties, and get people to adopt it. It is a trust issue, which is what I was trying to get at in my previous post. Would you hand over your dollars to a pseudo-bank that has no controls over it, nor anyone to bail it out if it goes bust?
But I'm unwilling to give my bitcoins to a pseudo-bank that has no controls over it, nor anyone to bail it out if it goes bust, too.
I am glad there are people more trusting than me who are willing to spend their own money on this experiment.
Aye, there's the funny thing about Bitcoin. There are complete controls over it, because the rules of the game are set out explicitly, and the laws of math and physics enforce them. You need governmental controls over a bank because the bank can lend beyond its means and thus destroy itself. And, at least if you believe in the premise of the Federal Reserve, you need a banker of last resort to ensure in a fractional-reserve system that there isn't systemic risk in the form of bank runs if the bank (or the economy) get sideways. But Bitcoin isn't a bank and no one has the power to kill it by over-lending or overprinting of money.
I'm not advocating you play the game. Bitcoin *does* require participants to have faith that other participants will continue to find it valuable. [Note: Same true for dollars. Same true for euros. Same true for gold].
And it is currently subject to wild swings in exchange rate.
But I hope this discussion is insightful.
Yes, very insightful. The wild swings may keep me on the sideline but it's helpful to understand why Bitcoins have created such a frenzy of activity.