Bitcoins: The Second Biggest Ponzi Scheme in History
Is this the same Gary North who predicted the collapse of society from the Y2K bug?
> North predicted a Y2K catastrophe in print and online,[31] and predicted that a Y2K date-rollover failure of the global Information Technology (IT) infrastructure would precipitate severe disruption and the complete collapse of the international economy, leaving American Christians to restore society following the collapse.
http://en.m.wikipedia.org/wiki/Gary_North_(economist)#Y2K_ca...
Edit: looks like he has a long history of claiming the sky is falling:
The analysis in this article is so flawed that it's hard to take it seriously. A more balanced analysis might have helped. Sure, bitcoin has several terrible characteristics that have been exposed over the past few weeks (volatility, tons of speculation, new users don't understand wallet security, etc.)
But to insinuate with absolutely zero understanding that the creators of bitcoin did this to get rich is just plain nasty. Maybe they did want to get rich (in dollar terms) but there is nothing obvious on the block chain that proves that they cashed out. The argument seems to be that they can't cash it all out so they are waiting for something. Well, they haven't cashed anything out yet as far as anyone who looks at the block chain can tell. It's already possible to cash out $5-$10MM easily over bitstamp which would represent a fraction of their holdings. Why not do that and make sure your future is taken care of? At least that?
Furthermore, for several years it did not look like bitcoins were going anywhere. However, the people behind it continued to work on it, and still continue to do so, but under much new pressure because suddenly they are evil ponzi dealers.
Applying old school economics and psychology is great, but I must ask this question. What kind of value appreciation did gold see when people suddenly for no reason decided that it was worth a lot? Following this value appreciation did people not use it as a means of exchange as well as a store of value? Why can't bitcoin be thought of as gold 2.0? We started valuing dollars, pounds, euros, airplanes, cars, oil, and those didn't exist for much of human history.
Bitcoin isn't like something we've ever seen before and that includes Ponzi schemes. It may end up crashing and burning and it may end up doing really awesome stuff.
I just wish the naysayers would come up with better researched arguments instead of this crazy witch hunt.
This article is unfortunately mostly right. Bitcoin's are 95% a ponzi scheme investment, and will at some point crash spectacularly. The question remains, however, whether from the ashes of that crash a useful product can remain, that can still succeed as a currency, or whether the psychological damage will prove to be too much to move past. If it can survive, it may even eventually return to the same high prices, but this time, based on its frequent use as a currency, and not based on rampant speculation.
Right now, the truth is that a negligible percentage of Bitcoin users care about its use as a currency (with the biggest exception being silk road type illegal uses). Almost everyone is focused on the price appreciation, and when that finally falters, it will collapse.
Important to note:
The author of the article, Gary North, is the same guy who predicted a "failure of the global Information Technology (IT) infrastructure and that it would precipitate severe disruption and the complete collapse of the international economy, leaving American Christians to restore society following the collapse."
Also, he "favors capital punishment for a range of offenders; these include women who lie about their virginity, blasphemers, nonbelievers, children who curse their parents, male homosexuals, and other people who commit acts deemed capital offenses in the Old Testament. He also favors capital punishment for women who have abortions."
Everybody reading his article should take this into account.
I truly don't get this "BTC is a Ponzi scheme" thing. And "Social Security is a Ponzi Scheme" in the third sentence really doesn't endear me to this writer...
I don't buy it. Yeah, Satoshi owns a stack. But if he sold out, the price would drop so hard it'd make your head spin... and I doubt Satoshi would be able to be rid of all of them in time before they bottom out. The market isn't large enough yet to pull that sort of scheme off.
Now, Bitcoin still seems like a good idea, with an implementation that seems to have some issues, and rampant speculation is going to stop the better ideas that it could embody from happening for a while. But a "Ponzi scheme"? Done deliberately for that reason? You're telling me that Satoshi knew it'd hit $1k per BTC? Pfft.
Something hit me while I was reading this article. Anytime you have seen a bitcoin article, usually on HN, but also elsewhere, it almost always shows a US Dollar figure for the amount and never the bitcoin amount. Why, because as this article suggests. Bitcoins are a commodity and not a currency and when we want to try and relate to bitcoins we use what we know which is Dollars. Good luck to all of you techies who read this story and are now trying to convert your bitcoins to dollars today.
This is as good a place as any to ask this question.
Do we actually know how many large mining groups we need to make up 51% of the processing power of the block chain (hopefully that make sense, from my understanding of bitcoin).
There has been a number of changes to the bitcoin protocol, which have been made in a short amount of time and unanimously, from what I can see. That implies to me that bitcoin is in practice much more centralised than we are sometimes lead to believe, and that moving to bitcoin is just switching from one shadowy control group to another.
I would be happy to hear evidence that I am vastly overestimating this problem.
All these arguments apply equally to gold. Also, gold was becoming a money slower because millions of market participants were not one click away from each other to figure out why is this new metal is any good and whether they should make a bet that it will become more and more useful as money.
The truth about USD vs Bitcoin is that Bitcoins you can own and USD you cannot. http://blog.oleganza.com/post/67362431718/you-can-own-bitcoi...
When someone "cashes out" into USD he doesn't really want to cash out in a lot of USD as it's a poor store of value by design. It's controlled, monitored, expensive and leaks like crazy. You can cash out into Maserati, but it's also not a good store of value. Therefore we see that more and more investors remaining with BTC are making a huge bet - a bet on universally accepted money. People who want to cash out quickly do so already without bringing price much down.
Some features of the quoted 'Austrian School's theory' seem remarkably close to Bitcoin: it "arises out of an unplanned, decentralized process. This takes time. It takes a lot of time. It spreads slowly, as new people discover it as a tool of production..." and "becomes widely used as money as a result of innumerable transactions within the economy".
It's arguable that the 'unplanned' part is not a necessary feature of a currency. In fact, no fiat currency in circulation today has survived without a significant amount of planning.
In contrast, the planning which went into Bitcoin seems to have made it closely fit the theory's description of money. Arguing that its planned nature negates its 'moneyhood' (to coin a phrase... sorry...) seems a little like arguing that an artificial organ won't work due to not having been grown within the host, or that a genetically engineered organism will fail due to not having gone through an evolutionary process.
From the BitCoin FAQ (http://en.bitcoin.it/wiki/FAQ#Is_Bitcoin_a_Ponzi_scheme.3F):
Is Bitcoin a Ponzi scheme?
In a Ponzi Scheme, the founders persuade investors that they’ll profit. Bitcoin does not make such a guarantee. There is no central entity, just individuals building an economy.
A ponzi scheme is a zero sum game. Early adopters can only profit at the expense of late adopters. Bitcoin has possible win-win outcomes. Early adopters profit from the rise in value. Late adopters, and indeed, society as a whole, benefit from the usefulness of a stable, fast, inexpensive, and widely accepted p2p currency.
The fact that early adopters benefit more doesn't alone make anything a Ponzi scheme. All good investments in successful companies have this quality.
> In this sense, Bitcoins is not a Ponzi scheme. It is simply a supermoney scheme.
Admits that bitcoin is not a ponzi scheme in his own article.
> The money was siphoned off from the beginning. Somebody owned a good percentage of the original digits.
Implies that most bitcoins are owned by satoshi nakamoto, without substantiating this claim by any number to quantify the impact. The estimated stash of satoshi is about 1 million bitcoins: http://www.theverge.com/2013/5/6/4295028/report-satoshi-naka... . Today 11 million bitcoins are in existence. There will be an eventual cap at 21 million bitcoins, so satoshis stash is somewhere between 9% to 4% of all bitcoins. By comparision the winkelvii own about 1% of all bitcoins. I'm not qualifying the risk this presents, but I think it's important for an accurate critique to provide quantification.
> Money develops out of market exchanges. Money is the product of the market process. It arises out of an unplanned, decentralized process. This takes time. It takes a lot of time. It spreads slowly, Money has continuity of value. This is not intrinsic value. It is historic value.
These statements are provided by the author to explain the nature of money. Note that they do not contradict bitcoin, except perhaps in the haphazard and sometimes too fast adoption. However, the statement about the duration of the establishment of a monetary system derives largely from theory that was wholly written before there where computers or the internet. Historical observation cannot be a good guide when circumstances changed radically.
> 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.
Volatility != Money, I find this a weak argument. Substantial volatility can manifest itself in established currency markets as well.
The remainder of the "critisism" of this author basically boils down to "It can't be, because I say so. Perhaps best exemplified by this statement:
> In other words, bitcoins cannot possibly fulfill their supposed purpose: to serve as an unregulated currency unit.
Author offers scant real critisism beyond the observation that bitcoin is very volatile. Nobody is debating this fact. Nobody is objecting to the assertion that bitcoins, due to their volatility, are a difficult medium to use for exchange.
Sadly, author is missing an opportunity to examine what other prospects and drawbacks bitcoins have beyond a simple discussion of the nature "it's so volatile, you're crazy".
I don't think it would be possible to kickstart something entirely new, which has a massive potential as a technology, and not go trough phases of substantial volatility (many disruptive tech startups valuation goes trough phases of massive volatility, for instance like the early history of Microsoft). Now it's possible that this dooms bitcoin. However, it could be argued that if bitcoin didn't reward early adopters, and if it didn't had massive potential, which would invite the eventual hypes and busts and massive volatility, then it would linger forver in an obscure niche appreciated in it's abstract beauty by crypto and math geeks alone.
I think it's laudable to try, even if you don't succeed. But if you don't try, you're guaranteed to not succeed.
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.
Only true if we see Satoshi spending his Bitcoins.
We have an online store selling baby products and really want to accept Bitcoins but we can't at the moment since Bitcoin is not widespread and price fluctuates madly. Once everybody got some and price is predictable in the short run, we'll show the finger to the bank, the real one siphoning from our pocket as commissions without actually providing any reasonable service.
Should I read past "It will never rival Social Security, however"?
While there is a great deal of insight in the Austrian definition of money, that does not disprove that Bitcoin is, or will be used as, money.
After all, the market may price bitcoins high today but even if they drop tomorrow, as long as they stabilize, they can be used as money.
Although it is true that whatever is the most liquid asset in the system becomes money, often that asset is liquid because of local law enforcement. Which is the case with fiat currencies.
Most money today is credit money. Bitcoin is not credit-money. The "underlying value" of bitcoins is not what's relevant. What's relevant in decentralized situation is the value TO SOMEONE of an asset is what they can trade it for of genuine use to them. So the value of a bitcoin today may be limited to speculating with it. But as more merchants accept bitcoin and the market is saturated and brings diminishing returns, the value of the bitcoin will stabilize.
Similar things happened with rapidly growing social networks, like Skype or Facebook. Those are the economics at play here. Initially maybe Facebook was a way to just put up your profile, because not all of your friends were on it. But eventually it became the way to stay in touch and update your friends on what's happening, because enough of your friends used it that it became useful.
When enough people trust bitcoin to accept it as money, then it will become money. Until then, the jury is out. But the network effect only grows stronger with the number of users...
Bitcoin is not an investment scheme. It's a payment system. Unfortunately people are looking at it as an investment scheme.
Even if it was an investment scheme it hardly fits the definition of a ponzi scheme. In any new investment whether it's a startup or bitcoin the early investors make out better than later investors. That is not the definition of a ponzi scheme.
"Companies will not sell goods and services based on Bitcoins. Bitcoins have to have stable purchasing power if they are to serve as money, and they will never, ever achieve stable purchasing power."
More & more companies announce that they accept Bitcoins on a daily basis, thus it has purchasing power & it creates value to the end consumer.
I might have read too quickly but from what I get the argument boils down too: too much volatility is bad, so it won't be used as money, so it isn't money. I don't think that is a good argument. There are many examples were currencies are highly volatile yet still function as money. On the oder side, after the 2011 crash, bitcoin hovered around 2-3dollar for months.
I don't know if bitcoin will succeed. I don't know if it will be used as everyday money. I know quite a few people who use it to buy drugs or takeout food. I know vast amounts of people who have never heard of it.
I don't think you can say anything about bitcoins future as money at the moment. Just that (as I explained in an earlier post) national governments might at some point have an incentive to restrict bitcoin, if it gets so successful it might make their financial policy ineffective. But this point (if it ever comes) is still far in the future.
A very emotional article IMO.
Volatility is not permanent characteristic of bitcoin. It's like saying that a newborn child will never be able to walk, because now it's only crawling.
At a certain point Bitcoin will stabilize. Whether that will be at 0 or 1 million, no one knows. Not the haters nor the fanboys.
Bitcoin is not a Ponzi Scheme because those rely on deception. If you'd set up an enterprise and clearly advertised that gains come from money later entrants contribute (as long as new entrants come) it wouldn't be Ponzi Scheme. Ponzi Scheme promises returns to everybody, and lies about where they come from.
Bitcoin is as open, transparent and honest as anything can be. Everything from the protocol, through the implementation to the all the transactions themselves are public. No one hides the fact that the gains in bitcoin price come from people wanting to buy bitcoins more and more. No one promises that this will always be the case.
He focuses on one usecase of bitcoins, while completely ignoring the other. Yes, bitcoins are being bought with the expectation that their price is going to raise in the future, and this clearly is not sustainable. But they are also being used to transfer money between individuals. There the price fluctuation doesn't matter that much (if the merchant immediately converts into USD).
Lately there have been many people saying bad things about bitcoin. I think those are people who had bitcoin on their radar a few months ago but didn't invest. And now they are just grumpy because they missed the opportunity.
The author completely omits the two main advantages of Bitcoin over traditional currencies/banking:
1) it's blazing fast. Ten minutes and someone deep in African desert can wire money to a researcher on one of those scientific outposts. Try to do that with a bank.
2) If done right, Bitcoins are anonymous like cash. In light of the recent NSA scandal, I don't believe a second that the NSA/other governments will reduce their programs. If I wire a thousand dollars to Pakistan, I bet I'll land on some no-fly list, even if the money was support for my family. With Bitcoin, this would not be possible.
I am a big skeptic of a lot of things but not Bitcoin.
Because even if you take away the bitcoin to dollar conversion, you still have a huge number of people who would be willing to trade bitcoin for goods and services because they have a huge investment in the hardware and power it took to make their bitcoins.
I was curious if Bitcoin would become a good solution to the quest for a micropayment system but it has been a victim of its own success and has become too valuable. However if its value dropped but still held some value, it would then return to a valid micropayment system.
F.A. Hayek would adore the concept of competing, globalized, & unregulated currencies (unregulated save for it's own algorithm). And that "Bitcoins, Peercoins, Litecoins and other competing crypto-currencies may be as significant today as the first minted coins of the ancients.
If crypto-currencies are bullshit because, as the author puts it: "...He made this money out of digits. He made it out of nothing...."Then all fiat currencies are bullshits.
What makes crypto-currency worthwhile is that the algorithm keeps it honest and it encourages saving
I see all these people calling themselves libertarians arguing against BTC but I have yet to see why BTC would fail.
I hate this "BTC is not money" argument because the core foundation of liberalism states basically "money is what people voluntarily choose to use as money". So if they are convinced that BTC works (works at least better than some alternative) , why shouldn't they use it as money?
Volatility is not an argument. Before "adoption" of USD and gold as money, they most probably were volatile as well...
What the author seems to miss is that while the features of Bitcoin might seem close to a Ponzi Scheme, Bitcoin was never meant to be a commodity to invest in. Bitcoin is useful and solves a real problem, and even if 1 Bitcoin goes down to $1, there will always be people using it as payment method for its features.
Also unlike a Ponzi Scheme, there's no single person that has the power to stop the whole operation. It's more like a drug than a Ponzi Scheme. And Bitcoin just hit the streets.
Yet again somebody writing about bitcoin who hasn't even read the FAQ, https://en.bitcoin.it/wiki/FAQ#Is_Bitcoin_a_Ponzi_scheme.3F in particular:
"In a Ponzi Scheme, the founders persuade investors that they’ll profit. Bitcoin does not make such a guarantee. There is no central entity, just individuals building an economy. A ponzi scheme is a zero sum game. Early adopters can only profit at the expense of late adopters. Bitcoin has possible win-win outcomes. Early adopters profit from the rise in value. Late adopters, and indeed, society as a whole, benefit from the usefulness of a stable, fast, inexpensive, and widely accepted p2p currency. The fact that early adopters benefit more doesn't alone make anything a Ponzi scheme. All good investments in successful companies have this quality."
Back to the article:
> somebody owned a good percentage of the original digits.
Ok, this sounds just like bitterness from somebody who didn't buy in early. See also https://en.bitcoin.it/wiki/FAQ#Doesn.27t_Bitcoin_unfairly_be...
Many naive people will be hurt by Bitcoin, yet people who promote it will not be punished.
Whilst history is punctuated with previous ponzi schemes, it is also punctuated with periods that required a store of wealth outside of a national currency.
I shared the author's view when BTC == $30, I'm tempering that now and starting to view it as a maturing alternative wealth store.
It may always be extremely volatile. However, now it has achieved a level of confidence, it will likely become another safe harbour in times of local currency disruption.
It's really annoying how the term Ponzi scheme is thrown about so carelessly.
He's right, sort of, about some things. Bitcoin is absolutely in a speculative bubble right now. People are buying it not to use as currency but to sit on it and watch its value appreciate. That's not good. Lots of people will be hurt when the inevitable crash occurs.
The bigger problem is that Bitcoin has intrinsically a deflationary nature. That's not a great property for a currency to have. Currency is meant to be spent. It's not meant to be buried in a backyard so that you can watch its value grow.
His points around the development of currencies are bunk. The fact that in the old days it took any currency decades or centuries to take a hold, is purely a function of that time. Bitcoin also does solve some big problems with the current financial system. Specifically today it's pretty friggen hard to move money around because of the insanely strict regulations around transfers. In an era of the internet and all that it enables, there is a huge pent-up demand for something compatible with "the internet way of thinking".
Everything you need to know about this author and article can be summed up by this:
> In other words, bitcoins cannot possibly fulfill their supposed purpose: to serve as an unregulated currency unit.
Oh that's funny, because for many years they have been doing exactly that with no end in site. Again , I say, the mental dissonance of bitcoin's naysayers is becoming more comedic by the blog post.
Bitcoin is the biggest prank of my lifetime. Hats off to Satoshi for figuring out the most remarkable get-rich-quick scheme in the history of the world.
Make no mistake, it will one day go down in flames, and 10 years from now people will write stories about bitcoin the same way they do today about how insane Iceland's banking system got, or Pets.com being worth $20 billion or whatever.
Betteridge's law of headlines: any headline asking a question, the answer is "no".
http://en.wikipedia.org/wiki/Betteridge%27s_law_of_headlines
VLM's law of economics commentary: anyone describing something as a Ponzi Scheme has no idea what a Ponzi Scheme is and is just trying to baffle/intimidate the reader.
(It might very well be a fraud / scam / ripoff / whatever but it sure as heck isn't a Ponzi Scheme)
This is a disease finance is unusually susceptible to. For a good laugh try to ask any joe 6 pack what a junk bond is, and all you'll get is babble about some hollywood actor said they're bad, or some vaguely anti-capitalist blather. You'll never, ever, get to hear what they actually were or how they fit into the context of finance during that era.
The biggest argument for not investing in Bitcoin is that anyone who is familiar with technology history can see that it is too early to pick a winner. Bitcoin is better compared to something like TCP/IP. The winner is likely to be something derived from it, probably something that hasn't been invented yet.
Bitcoin always makes me think of the tulip bubble of 1637[1] where tulips became more expensive than gold, and people purchased them as a speculative commodity. [1]http://en.wikipedia.org/wiki/Tulip_mania
Going gtom "interesting" to "bullcrap" in 2 sentences:
(It will never rival Social Security, however.)
No, the whole economic system is the biggest Ponzi scheme.
I think bitcoin will succeed when there are insured bitcoin banks in which to keep your money. Right now the wallet system is really too confusing for non-technical users and it is risky to keep your money in a fly by night wallet service. Keeping your money in a bank is easy.
Calling a 'Ponzi Scheme' it's just too simple or judgmental IMO, but despite the articles flaws, finally someone started questioning "What's backing all that money?".
Our real money is created out of thin air, backed by nothing for a long time. There is a lot of fantasy and conspiracy theories behind it, but it is a problem in the end of the day. When the money started to be electronic things got even harder to find out what exactly is backing up that money value. Humongous amount simply floats from bank to bank.
While with the existing money is difficult to get to it's primary root of source, with bitcoin this applies pretty much to every penny going around. In theory it's beautiful, but it's an utopia.
All these people talking about Ponzi schemes are ignoring a few things.
Bitcoin is a useful technology.
It's is in limited supply, as money pretty much has to be.
It's not backed by commodities, and can't be, if you want to avoid vulnerability to the sort of government attack that shut down E-gold.
When you're starting out with an intrinsic value of zero, and you have limited supply, there's no way for a currency to gain substantial real-world usefulness without a large price increase along the way.
People hoping for gain still spend bitcoins, they just replace them right away.
>It will dwarf anything dreamed of by Bernard Madoff.
Madoff's fraud was to the tune of >60 billion.
Bitcoin's cap is at round 10 billion.
So the author expects btc to rise in value by at least 600%
What can a bitcoin be used for, other than as a medium of exchange, which also increases demand for the remaining bitcoins?
To (unqualified) me, this seems the crucial question. If your money is not propped up by government fiat, it better have some non-monetary uses to succeed in the long run. (And it should not be possible to satisfy that non-monetary use by an arbitrarily small amount of "money".)
Not directly related to the article, but recently I have heard few complaints about limitations of converting Bitcoins to us dollars (or any other official currency). If these complaints are true, how come these limitations exists? it affects the true value of the coin and works against logic & advantage that Bitcoins has to offer.
Anyone can share some information about the Bitcoin selling limitations?
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If Bitcoin's market cap is a scheme, what is then Apple's market cap?! USD is the biggest scheme there is, when you think about it. Bitcoin was born out of demand, not as a scheme. The only negative side is the speculators who move the price up and down by tens percent daily, but when more money get into Bitcoin, their job will only get harder.
Wow, what a poorly reasoned article.
My only counterargument for now; Bitpay https://bitpay.com/bitcoin-exchange-rates
I've recent been using bitcoin as money for lots of things. easiest way to cash them out
Money is created as debt out of nothing. The money to pay interest on this debt does not exist. Bitcoin is valuable because it facilitates exchange over the internet. I'm looking forward to the "great winter."
There's so much envy towards those who made money from Bitcoin, it's not even funny. Many try desperately to manipulate the market. Others greedy by nature live in denial as a self-preservation.
tl;dr: Bitcoin wouldn't be Ponzi Scheme if it could become money. It can't be because its price is too volatile. Therefore bitcoin is Ponzi Scheme.
My answer: Volatility is inversely proportional to the wealth that has been exchanged into bitcoin. At the moment individual with few hundred million $ could swing bitcoin market up and down as he pleases. It will be much harder if people stuff trillion dollars or so into bitcoins.
I thought the biggest Ponzi scheme was the current monetary system, whereby a few organizations can create money out of nothing?
Even if Bitcoins may very well crash as some point (even soon), this point is so poorly argued that it was a pain to read.
Bitcoin is just another social network. It's Facebook for money or the Internet of money. It's not a ponzu scheme. Get over it. I'm sorry you didn't buy when they were cheap. Know the utility of bitcoins is real and they're everywhere.
Someone is going to be eating their hat in a few years (or less).
It should be noted that not
Austrian economics are so painful. Its amazing to me how impervious to contrary evidence its adherents are... their blind faith in their core beliefs are so unshakable. Every time I read one of them say that money arose from markets I wonder why they don't sponsor a bill that sets up an agency like NOAA that watches for dangerous conditions in this primeval force called "the market" so that people can be warned when "the market" is angry and another virgin needs to be tossed into its going maw in an act of propitiation.
Just the idea that markets pre-date states is so ingrained.
I have extra kidney to sell if anyone's interested. Payment will only be accepted in Bitcoins.
Lol a history PHD commenting on tech economics.
I think the most important lesson is that traditional economists are just going to have to learn to live with the fact that their theories don't explain bitcoins.
or they might just be kicking themselves for not buying coins sooner. lol.