Ponzi schemes, or pyramid schemes, have been prevalent for eons, across all markets. Understandably they’re also prevalent in the cryptocurrency space. But is Bitcoin a Ponzi scheme as naysayers claim?
Let’s first take a look at what makes a Ponzi scheme, and who benefits from one. Then we can compare this to Bitcoin and clearly come to our conclusions.
What’s the appeal of a Ponzi scheme?
The appeal of a Ponzi scheme is the get rich quick and ‘too good to be true’ promised returns that lure investors in, allowing greed to ignore warning signs. Often uneducated investors can fall vulnerable to these types of fraudulent schemes.
The individual or corporation who runs the Ponzi scheme uses new investment money to pay out the promised returns to the existing investors. This means there’s a continual need for new money coming in.
How do they work?
So imagine you’re promised a return of 10% per month, which is oh so appealing when you compare it to savings or other returns. You invest £1,000 and each month you receive £100 back, or you see £100 added to your original investment on the balance sheet. Great, you’re getting the returns promised, so you tell other people about it. Friends and family who trust you.
If it’s a pyramid scheme, then you might get paid a commission for introducing friends and family who also become investors. They too put in their £1000 and see a £100 return each month, so they tell their friends and family. And so it continues.
The problem is, the new investors money is being used to pay out these returns. There is no real growth in the investment vehicle. So as soon as new money stops flowing, then the scheme is in trouble and will not be able to continue making the promised returns.
Another tactic is to offer you an incentive to keep your initial money invested, or locking it in for a set amount of time. Again this gives the scheme the funds it needs to pay out those promised returns.
What are the warning signs?
Outside of the promised returns, Ponzi schemes are very opaque about their investment strategy. Often veiled behind the idea that it’s a propriety AI trading programme that they can’t reveal otherwise they’d be giving away their Intellectual Property.
You’ll be able to find very little on the financials of the company, often will you not find much about where they are located and who the team is behind the ‘opportunity’ that can verify what they’re saying to be true.
What are the risks?
When you look to take your money out, you’ll find you can’t get it and the promoter/company suddenly disappears on you with all or most of your money.
If you’re lucky to be in the scheme early enough, you might come out of it unscathed and indeed with some good returns. However, ultimately the person who benefits is the person, or the persons involved with setting up the Ponzi scheme. The ones who hold your money, and every other investors money and can decide when they want to disappear as it’s looking likely the scheme is no longer viable moving forward.
Unsurprisingly these types of fraudulent investments are illegal in most countries.
Let’s take a look at Bitcoin to see how this fits in with the Ponzi scheme theory.
Bitcoin was created by Satoshi Nakamoto, who has never been identified as a person, or group of people. So that ticks one of the warning signals, who is the person or persons behind Bitcoin?
However that’s as far as it goes. Satoshi Nakamoto hasn’t commented or been seen online for a number of years now, amidst rumours and speculations of who and what has happened to Satoshi Nakamoto. But Bitcoin remains.
The white paper on Bitcoin was published in 2008 and circulated via email to fellow cryptograph enthusiasts, the enthusiasm for the cryptocurrency has grown from there, bringing unprecedented interest and price in 2017. We’re seeing a price correction currently under way in Q1 2018. But this enthusiasm has grown over the last 10 years (quite the slow burner if it’s a Ponzi scheme) and without the promise of guaranteed returns.
Bitcoins software is open source, that means anyone anywhere can download it and read every line of code. There is a public record of every single transaction dating back to the very first one.
The Bitcoin community is now full of developers, coders, miners and users. No one person owns Bitcoin, it’s not a company. Any one who holds bitcoin and has the private keys owns the bitcoin (or part thereof). There is no promise of guaranteed returns.
If you think you’re being offered the opportunity to buy Bitcoin (BTC) yet you’re being offered guaranteed returns, then you won’t be holding BTC and you need to do more research before parting with your hard earned cash.
Bitcoin itself is not a Ponzi scheme, but unfortunately there are schemes that crypto experts have identified as Ponzis or just plain scams. Please be careful and do your research.
If you’d like to understand more about Bitcoin, then you can find a number of articles here on BitcoinBro.
I’d also recommend following @aantonop and watching his videos which you can find here https://antonopoulos.com/.