Is Bitcoin a Ponzi Scheme?

(Picture from the Internet)

Donald Trump, the 45th President of the United States, said in a live telephone interview with FOX TV that Bitcoin is a scam. Former President Trump did not specify what kind of scam it is. However, there is a very common saying that has been heard for many years that Bitcoin is a "Ponzi scheme." So, is Bitcoin really a Ponzi scheme? We need to first find out what a Ponzi scheme is.

The so-called Ponzi scheme, as the name suggests, is a fraudulent method invented by a person with the surname "Ponzi". In fact, this person with the surname "Ponzi" is a foreigner. Specifically, he is an Italian. More precisely, he is an American who was born in Italy and later immigrated to the United States. His full name is Charles Ponzi. This Ponzi was born in 1882 and died in 1949. Ponzi immigrated to the United States in 1903, pursuing his American dream, his dream of getting rich, and his dream of getting rich quickly. He made it all the way until he was 37 years old, and then he realized that it was faster to make money in finance. So in 1919, he invented the financial method that was later called the "Ponzi scheme". Through the so-called stamp card arbitrage business, he promised a quarterly rate of return of 40%, attracted 30,000 investors in 7 months, and raised $15 million in investment. Early investors received generous returns. For a time, Ponzi was called by Americans as one of the three great Italians along with Columbus (the discoverer of America) and Marconi (the inventor of radio).

After 2000, Bernard Madoff (1938-2021), former chairman of the Nasdaq Stock Exchange, successfully defrauded the top wealthy class of more than $60 billion in eight years by promising a fixed return (8-12% annualized) in the form of a fund. Madoff's method is also a Ponzi scheme, but unlike Ponzi, Madoff does not cheat the poor of their money, but only the rich of their money. It can be said that he is better than his predecessor. Time flies and it is 2018 again. There is a digital currency wallet called Plustoken, which claims to have high returns for investors through the so-called smart dog quantitative arbitrage, attracting investors to invest in cryptocurrencies such as Bitcoin and Ethereum, and the final amount of fraud is as high as hundreds of billions of yuan. Although the transaction medium has been upgraded from the US dollar to Bitcoin and Ethereum, and the fictitious investment story has been upgraded from stamp card arbitrage to smart dog arbitrage, the method of the Ponzi scheme has not changed.

So what exactly is a Ponzi scheme? If we look through some vague materials, we will see some seemingly plausible summaries, such as high investment returns, robbing Peter to pay Paul, opaque investment conditions, counter-cyclical stable returns, and pyramid structures of investors, etc. However, these summaries do not help you identify whether a method is a Ponzi scheme. High investment returns do exist in certain specific targets and at certain times, such as angel investment in innovative companies. The method of robbing Peter to pay Paul is often invisible to ordinary people, and you cannot make a judgment based on this. The problem of opaque investment conditions is very common, and information asymmetry exists. Otherwise, why would investors hand over their funds to professional investors? It is precisely because of information asymmetry and professional knowledge asymmetry that professional investors can easily fabricate rhetoric to deceive investors into believing that the investment is real, effective, and reliable. Counter-cyclical stable returns are even more professional. Bank deposits, money funds, and some financial management are also not affected by cycles, and ordinary investors have no way to distinguish them. As for the pyramid structure, it is just a method used by the Ponzi scheme to develop and promote itself. Just as advertising is not the business itself but can only be an auxiliary to the business, pyramid promotion is not the core of the Ponzi scheme but just its marketing method.

The core element of a Ponzi scheme should be a pool of funds, which is mainly or entirely replenished by the investment capital of new investors, and the loss rate of this pool of funds increases with the increase in the number of investors, because it promises that every investor can enjoy a rigid, non-loss, compound rate of return. This promised rate of return can be high or low, the key is to be credible and sound self-consistent. For example, Madoff's promised annualized rate of return is very reasonable, which is why he was able to win the trust of so many smart rich people. As for product promotion, whether it is advertising or pyramid marketing, it is not a key element of a Ponzi scheme. When the loss rate of the pool of funds is greater than the replenishment rate, the pool of funds will face the risk of collapse. When the funds are exhausted, the pool of funds cannot keep its promise to repay investors, and it collapses.

Many actual business activities also have the shadow of Ponzi schemes, such as P2P, shared bikes or long-term rental apartments, which are finance-driven businesses. If they can find new cash flow before the collapse, or a new round of investment, or bank loans, or more new customers, they can temporarily survive. But sometimes the funds found may be a bigger thunder, which is drinking poison to quench thirst.

At this point, let's go back and look at Bitcoin. Is Bitcoin a Ponzi scheme? Obviously not. First, Bitcoin has no capital pool. On the contrary, Bitcoin eliminates the capital pool. The most important invention of Bitcoin is point-to-point value transfer, which does not require any trusted intermediary, so there is naturally no intermediate capital pool for transfer, which completely eliminates the possibility of the intermediary playing a Ponzi scheme through the capital pool. Second, Bitcoin has never promised investment returns. In fact, not only does Bitcoin not promise any rate of return, Bitcoin does not have a rate of return at all. It is only because you use the US dollar to benchmark Bitcoin outside the chain that the so-called rate of return concept is generated in your subjective consciousness. On the Bitcoin chain, there is only Bitcoin, and one Bitcoin is one Bitcoin, which will neither increase nor decrease. As for the US dollar price of Bitcoin, that is the US dollar's business, not Bitcoin's business. If you use US dollars to buy Bitcoin, you are also responsible for your own profits and losses and risks, and you must be fully responsible for yourself.

The above two points are enough to judge that Bitcoin is not a Ponzi scheme. The most important elements of the Ponzi scheme, the capital pool, and the practice of robbing Peter to pay Paul, do not exist in Bitcoin. Moreover, all the transfer records of Bitcoin are open, transparent and verifiable on the blockchain. From the source code to the ledger, everything is public, and there is no secret. Bitcoin itself is actually not on the same level as the Ponzi scheme. Bitcoin is on the same level as the US dollar. The Ponzi scheme can be carried out using the US dollar or Bitcoin, but this does not mean that the US dollar or Bitcoin is the Ponzi scheme itself. Just like a person uses a fruit knife to commit a crime, it cannot be said that the fruit knife is the perpetrator. He does not use a fruit knife to commit a crime, but can also use a hammer or a gun to commit a crime.

Former President Trump did say something that accurately positioned Bitcoin. He said that Bitcoin is another currency competing with the US dollar.