People's Daily Online: Virtual currency is ultimately a pipe dream and a Ponzi scheme

Recently, Bitcoin has plummeted all the way, falling below the $18,000 mark on June 19, which is the lowest point of Bitcoin since December 2020. The risk of virtual currency trading speculation has once again become the focus of public opinion. In recent years, the price of virtual currencies has soared and plummeted frequently. China's financial departments have issued documents many times, clarifying that virtual currency-related business activities are illegal financial activities, and reminding investors to be vigilant about risks.
"What exactly is virtual currency?" The author of this article believes that virtual currency is becoming the largest Ponzi scheme in human history. In order to keep this scam going, the currency circle has tried every means to give it various cloaks.

Since Satoshi Nakamoto published Bitcoin: A Peer-to-Peer Electronic Cash System in 2008, which led to the official birth of Bitcoin, the debate surrounding cryptocurrencies has never stopped. Followers of the so-called "decentralized" currency regard it as a belief that cryptocurrencies will eventually lead them to a utopia; some believe that cryptocurrencies are just another paradise created for speculators; and some firmly oppose and boycott cryptocurrencies.

Among the top 100 richest people in the world, at least 90 have publicly expressed their pessimism about virtual currencies, including Microsoft founder Bill Gates and "stock god" Warren Buffett. Warren Buffett believes that the only thing that can be confirmed about virtual currencies is that "it will not generate any value." He publicly said that "Bitcoin is rat poison, stay away from it." And his old partner Charlie Munger bluntly said that investing in Bitcoin is an "evil and stupid" thing.

"What exactly is virtual currency?" In essence, the author believes that virtual currency is undoubtedly the biggest Ponzi scheme in human history.

(one)

Old scam, new form

In short, the so-called "Ponzi scheme" is to absorb funds by promising high returns, and then use the funds of new investors to pay the interest of previous investors to create the illusion of making money, and then defraud more funds until this snowballing method can no longer be sustained, so that the lies are exposed and the bubble bursts.

Traditional Ponzi schemes revolve around high cash returns, with "high interest + deposit absorption" being its two most notable features. With the development of the financial sector, Ponzi schemes have also evolved into new forms, no longer focusing solely on cash, but instead taking on the guise of equity. This type of Ponzi scheme can be classified as "equity-based," with three main features: first, it is based on valuable equity; second, the equity can be traded and circulated; and last but not least, the equity is not associated with any assets, production labor, or social value, but is completely fabricated out of thin air.

Value theory is the foundation of economics. Relying on value exchange, humans have built an economic society, and the creation of social value must be achieved through production labor and the circulation of products. The basic purpose of finance is to estimate the present value of social value that can be generated in the future based on the combination of existing production relations and means of production, and to realize value transfer through transactions, as well as to provide investment and financing guarantees for the real economy.

Equity Ponzi schemes are frauds disguised as finance. One of the basic laws of finance is that the further a financial product is from reality, that is, the higher the degree of "decoupling from reality", the greater its risk. Looking back at the two world economic crises in the 1920s and 1930s and 2008, one thing in common is that finance is "decoupling from reality". For example, subprime loans are designed with countless financial derivatives on top of mortgage loans, which eventually deviated from the true value of the corresponding real estate, triggered the subprime mortgage crisis, and eventually evolved into an economic crisis that swept the world.

The so-called "equity" of an equity-based Ponzi scheme is completely unrelated to any real assets or productive labor, so it has no actual value. It can be considered that it is infinitely far away from the real society, which means that its risk is close to infinity.

Comparing several basic characteristics of virtual currency, it is not difficult to find that it is very consistent with the equity-based Ponzi scheme.

1. Equity. All virtual currency projects will generate coins with no actual value through mining or issuance, and forcibly give them a right based on legal currency pricing by giving them a series of names that have nothing to do with the real world, such as "consensus value" and "co-governance value".

Second, liquidity. Obviously, all virtual currencies can be traded freely. It is hard to imagine that the so-called "currency circle" would tolerate the existence of a virtual currency that cannot be traded. After years of development, virtual currencies already have many secondary trading markets, but in many cases these trading markets are not as open, transparent, and fair as people initially imagined, but are full of insider trading, shady operations, and security loopholes.

3. Valuelessness. Whether compared with the traditional metal-cast currency or the modern credit currency issued with the credit of sovereign states, virtual currency is not bound to anything valuable, and it does not have any social value of production labor. Its price support depends entirely on two decisive factors: the confidence of current participants and the number of subsequent new participants.

This is completely consistent with the basic operating model of the Ponzi scheme - all Ponzi schemes must have a steady stream of new investors joining, using new investors to support old investors and stabilizing old investors to attract new investors, in order to maintain the entire scam. To borrow a widely circulated saying in the game industry, "From the perspective of the game industry development, the first important thing is the gameplay, the second important thing is the worldview, and the third is technology." For a Ponzi scheme, the first important thing is to attract new investors, the second important thing is to attract new investors, and the third important thing is still to attract new investors. This is why the operation of all virtual currency projects is completely based on marketing, and the technical investment can be almost ignored.

So it is easy to understand why Musk can make Dogecoin so powerful and send a tweet to make the price of virtual currency soar. In the early days of the rise of virtual currency, the market was flooded with countless ICOs (initial coin offerings), which were also based on the same logic. After the appeal of ICO gradually declined, concepts such as "airdrops" followed. Behind all the tricks, in fact, is the "greater fool theory" mentioned by Bill Gates: It is not terrible to be a fool, but it is terrible to be the last fool, so more fools need to be attracted.

(two)

Can everything in the world be earned?

Smart cryptocurrency traders later discovered that although “airdrops” give away virtual currency for free, it is precisely because it is “free” that “new investors” tend to take it lightly. In order to keep the virtual currency Ponzi scheme going, the cryptocurrency industry has tried every possible way to add various packaging to it. The recently popular “X2E” model is the latest emperor’s new clothes.

X2E refers to a series of virtual currency projects named X to Earn, including M2E (Move to Earn), P2E (Play to Earn), etc.

"Running and making money at the same time" seems to be an attractive business model, but it is actually a phishing strategy of the project party. The hidden trap behind it is that the generation of virtual currency (especially tokens that do not require mining) is free of cost. X2E is actually an "airdrop" (referring to the provision of free cryptocurrency). The only difference is that users can earn it through some simple daily activities, so that users feel that because they have put in a certain amount of labor, they have the illusion that it is valuable. Its ultimate goal is to attract users to speculate on equity transactions.

The core condition for the equity Ponzi scheme to continue is that new users continue to join and continue to trade. Only in this way can the price of equity be stable. When the number of new users and trading volume reaches a certain level, the price will continue to rise, allowing early "investors" to profit. At the same time, this price increase will become more and more attractive to new users. This cycle repeats, and it seems that there are no flaws and everything is fine.

However, this state is actually built on an extremely fragile balance. Everyone must believe that this cycle can continue to operate. Once malicious short selling, lack of successors, capital tightening, or changes in regulatory policies affect the confidence of participants or the determination of latecomers, this seemingly exquisite cycle will collapse instantly and its value will return to zero. In the final analysis, this is still a Ponzi scheme, a game of passing the parcel.

As the X2E concept becomes more popular, more and more such projects have sprung up, including M2E and P2E, R2E (Read to Earn), W2E (Write to Earn), E2E (Eat to Earn), etc. Some even launched L2E (Learn to Earn), using education as a starting point to reach out to minors who do not yet have the ability to make economic judgments.

Marx once said, "If there is a 100% profit, the capitalists will take risks; if there is a 200% profit, the capitalists will defy the law; if there is a 300% profit, then the capitalists will trample on everything in the world." When a Ponzi scheme project's new customer acquisition activities begin to target innocent children, its operators have already lost their basic humanity.

(three)

What you speculate is just a mirage, but what you lose is real money

Nowadays, virtual currency is attracting more and more speculators with the potential to get rich overnight, and it has infiltrated into all aspects of real life under the guise of X2E, waiting for an opportunity to wield its sickle to harvest ordinary people from all walks of life who are unaware of the situation. As an outright scam and a 100% risky speculative asset, the risks it contains are undoubtedly huge and real.

In May this year, UST, once the world's third largest stablecoin, and its pegged virtual currency LUNA staged an "epic return to zero". In just a few days, LUNA coin fell from a high of US$100 to a low of US$0.00000112, and a market value of more than US$40 billion evaporated in an instant.

There are many opinions on why LUNA and UST collapsed instantly, but one point that few people mention is that they combine the two Ponzi schemes of cash and equity, which are intertwined. On the one hand, unlike other stablecoins, UST does not use the same amount of US dollar deposits to anchor the 1:1 exchange relationship with the US dollar, but forms a price balance with LUNA through supply and demand, and guarantees each other, which also meets the characteristics of the equity Ponzi scheme; on the other hand, the project party launched a financial management project with an annualized interest rate of up to 20%, absorbing a large amount of funds from new investors, but did not generate any actual income to achieve the promised returns, and the conditions of the cash Ponzi scheme were also met.

Since neither LUNA nor UST has corresponding actual value, the value guarantee of the two has no credit foundation, and it all depends on the confidence of all participants built on castles in the air. When someone smells the smell of a Ponzi scheme and starts to withdraw, or the project party cannot maintain high interest, it is easy to cause panic, and then trigger a series of chain reactions. The risk of a single Ponzi scheme is already extremely high, and the combination of the two types forms a death spiral, and the risk is rising exponentially. It is not surprising that an "epic zero" occurs overnight.

From an outsider's perspective, the collapse of LUNA may just mean witnessing the bankruptcy of a lie and adding some after-dinner talk. But for those involved, it was a nightmare that they didn't know how to face. A screenshot of a tweet circulated on social media at the time showed the tragedy of a participant: he spent a year and a half to convince his wife to invest all their $1 million assets in LUNA, but lost 98% in a few days. He "didn't know how to face his wife and his future life."

The risks and dangers of "cryptocurrency speculation" can be seen from this.

(Four)

Ruined virtual currency and misunderstood blockchain

From 2013 when the People's Bank of my country and other departments issued documents clearly warning of the risks of speculating in virtual currencies, to 2017 when all types of virtual currency ICO (coin issuance) were strictly prohibited, to 2021 when all types of virtual currency "mining" and trading were strictly prohibited, my country's attitude towards cracking down on virtual currencies has been consistent and resolute.

It is worth pointing out that the huge value of blockchain technology should not be ignored because of virtual currency.

From a technical perspective, blockchain is essentially an information system that uses broadcast data transmission to reach consensus on data structure, traceability, authority and verifiability, forming a distributed, open and transparent system. Virtual currency is just a simple application based on blockchain.

Including NFT, which has been very popular in the past two years, it is essentially a database technology based on blockchain. Whether it is blockchain technology or NFT database technology, as a technology, there is no specific business attribute. As long as the correct industry guidance is carried out and clear laws and regulations are formulated, they will play a huge role in various application fields such as digital economy, digital culture, data rights, privacy protection and computing power network in the future. The "Public IT Systems" with blockchain as the primary form will innovate the design ideas of the entire information system from the bottom up, thereby improving the capacity and quality of information systems in the new era.