Nonsensical Idea of the Day: "Bitcoin is a Ponzi Scheme"

Mish

It is absurd to label bitcoin a Ponzi scheme. Yet that is what Jim Rickards says. Ironically, Bitcoin is an anti-Ponzi setup, regardless of what it is used for, regardless of whether or not it's in a bubble.

In a video interview with Hedgeye CEO Keith McCullough, not only did Rickards state that he agreed with Jamie Dimon, he made this claim "I call it a Ponzi with no one in charge. There's no Madoff, but it's working that way.”

Rickards points out that primary uses of Bitcoin are money laundering, capital flight, etc. But what does that have to do with being a Ponzi scheme?

“Bitcoin has not been combat tested in a business cycle.We have not had a recession or a financial crisis since 2009. I’ve seen all these other asset classes go through many business cycles. I know how they’ll behave. Bitcoin has not been tested in that arena,” says Rickards.

I agree. But what does that have to do with being a ponzi scheme?

Ponzi Definition

A Ponzi Scheme is a fraudulent investment operation where the operator generates returns for older investors through revenue paid by new investors, rather than from legitimate business activities or profit of financial trading.

There is no revenue to speak of. When someone buys a bitcoin someone else gets a bitcoin. The number of coins slowly increases in time but the algorithm itself helps prevent fraud. It does not stop theft or someone losing their keys and thus their coins, but again that does not fit the definition.

Nor does the fact that criminals demand ransom in bitcoin. There are fraudulent activities in dollars, euros, silver, gold, and yes Bitcoin. If fraudulent activity makes a currency a Ponzi scheme, then gold is a Ponzi scheme as well.

There is no magic bullet that will stop fraudulent activity, but the key is the currency in and of itself is neither a fraud nor a Ponzi scheme.

Those looking for Ponzi schemes might wish to consider public union pension plans or preposterous amounts of interest on public and private debt that require ever-increasing amounts of debt to keep the system running.

Neither Bitcoin nor gold have anything in common with debt pyramids Ponzi schemes.

Rickards' Game

Rickards has increasingly makes nonsensical statements of which I believe he has to know better.

August 29: Gold and Bitcoin Hype: How Inflation Could be Caused in 15 Minutes

September 11: Rude Awakening for the US in January? No, Just More Alarmist BS From Rickards

September 14: Rickards: “Next Financial Crisis 6-8 Months Away” Got Popcorn? Gold?

Hype sells.

If Rickards is seeking publicity, well, he got it. Congratulations. I prefer other ways.

Mike "Mish" Shedlock

Comments (20)
No. 1-20
formula57
formula57

Pyramid scheme is rather strong and, as you show, not technically correct. Recall that the chief reason that makes holding government issued currency is necessary is that it is the only acceptable means of settling tax obligations due to a sovereign power. Holding Bitcoins (one of some 800 crypto-currencies at present) has no such complusion about it and is attractive only so long as others accept them, clearly, and there must be some considerable risk that the number of others may diminish as fashion and government action change in ways that are detrimental to Bitcoin. Accordingly, if the flow of new holders is stemmed for any reason and especially if numbers of existing holders exit, Bitcoin is at risk. In that sense, the pyramid description is not wholly fanciful.

gstegen
gstegen

Bitcoin and other cryptocurrencies seem to fit the definition provided pretty well: "A Ponzi Scheme is a fraudulent investment operation where the operator generates returns for older investors through revenue paid by new investors, rather than from legitimate business activities or profit of financial trading." The main difference I see is that bitcoin etc. are perhaps not fraudulent since the whole scheme is disclosed up front.

El_Tedo
El_Tedo

gtsegen, by that reasoning, Social Security isn't a Ponzi scheme because we all know what's going on.

madashellowell
madashellowell

Speculation is always Ponzi based. The ONLY reason people are buying crypto right now is for speculation. Speculation is never based upon fundamentals...value. It is based upon buying low and selling high....money for NOTHING. This IS the human weakness and it has only been controlled by actual LOSS, RISK. Money for nothing has always been recognized as associated with RISK, and yet RISK is what our government and large corporations are working feverishly to suppress, HIDE or simply defer. Our stock market gives a signal to ALL risk "markets" that there is no risk and if we watch bitcoin, its rise has followed all of the rest of the speculative "market". At this late date is is pure denial to suggest that there is ANY market that is not speculation, a PONZI by any other name.

madashellowell
madashellowell

Most Ponzis are known to be ponzis when people buy in. the intent is to buy low and SELL before it collapses. Our stock market as with our cryptos are not buy and hold. They are not "investments". There is virtually NO owners of stock who simply buy and put them in a drawer for thirty years. Every "investor" is WATCHING and has a finger on the sell button, waiting for the moment that informs them the the top has been reached. A purely speculative play.

madashellowell
madashellowell

A true investor is INVESTED. They start a business and even when that business turns down, they do not sell, they double down, work harder, try other things. A modern investor simply watches, waits and sells. Money for nothing....premised on being smarter or simply more lucky than everyone else.

WildBull
WildBull

The problem for a few decades is that real growth has been slowing and is now practically stopped. Buy and hold works in a growing economy, because your slice of the pie grows as the pie grows. To come up statistically better than no return takes speculation in this environment.

jks
jks

“Bitcoin has not been combat tested in a business cycle. We have not had a recession or a financial crisis since 2009. I’ve seen all these other asset classes go through many business cycles. I know how they’ll behave. Bitcoin has not been tested in that arena,”

jks
jks

Rickards is advertising his ignorance about bitcoin as usual. Bitcoin is borderless and Rickards' head is stuck in USA only. What's left of Venezuela's broken economy runs on bitcoin. People in several other countries depend on bitcoin for commerce.

Mike Mish Shedlock
Mike Mish Shedlock

Editor

Where's the revenue? There is no revenue and no dividends. There is no interest paid. A stream of new investors is not required.

maxblockm
maxblockm

It's not a pyramid, it's an S-curve.

CautiousObserver
CautiousObserver

The price of Bitcoin may be a “Bubble” and not a “Ponzi:”

http://www.diffen.com/difference/Bubble_vs_Ponzi_Scheme

Many assets are also potentially bubbles, so it is difficult for me to single out Bitcoin as being a worse investment than say, Netflix common stock. Unlike Netflix, Bitcoin does not burn shareholder cash every month to continue operating! My major concerns with Bitcoins are a large number of Bitcoins are held by a small group of people and Bitcoin depends on tech supplied by others to be operable (electricity, software, hardware, miners, etc). There is no obligation for anyone to continue providing said tech if it is no longer profitable to do so. I think Bitcoin’s main utility may be for transfer of capital between countries and as a lifeline during hyperinflation (Venezuela, Zimbabwe). Obviously it has also been useful for speculation lately...

TheCaptain
TheCaptain

A Ponzi is characterized by price support for current holders of the "asset" coming from new buyers only because there is no inherent value in a Ponzi and all of them are understood to be bankrupt as soon as everyone tries to get their money out at once. A bubble is different. In a bubble there is true value in the asset. Gold coins held in your hand may be a bubble at any point when priced in dollars but they will never become worthless and thus are not a Ponzi. Stocks are just another fiat currency. Most have no inherent value because they are not really ownership rights to anything. They can go to nearly zero even though the underlying company is still in business. Look at SIRI for an example of this. Even if you hold your share certificates in hand you can never demand anything in exchange for them. They will only exchange if some greater fool is available to trade you something of real value for them. The notion that company shares have value and are a place for your life savings is fairly new in history. The notion that gold has value is ancient. When conquistadores went to the Americas they were looking for gold. Why? Because somehow gold was universally deemed to be valuable in all of Eurasia at the time. Importantly, when they got to the Americas they found that the locals, who never had any exposure to Eurasian values, also hoarded gold (and silver) as stores of value. That is truly impressive - the entire world seems to have independently come to the belief that precious metals were precious even though there was no real good use for them. Gold is too soft to make good weapons or tools from. Yet still it happened. JP Morgan once said that gold is money and everything else is not. Another version of this is that gold is money and everything else is credit (i.e. a claim on gold once you unwind all of the complexity and derivatives). Who knows when it will happen but someday we will find out that JP Morgan was right.

CautiousObserver
CautiousObserver

Hypothetically, if the three largest holders of a virtual placeholder called “Bitcoin” paint the tape to push the published price up after they establish their original positions for almost nothing, is that a Ponzi or a Bubble? If outsiders sometimes pay shockingly high amounts to speculate on future price appreciation are they victims of fraud? What if every outsider who purchases Bitcoin first checks a box that states: “The price of Bitcoin is controlled by a cartel. You may lose 100% of your investment.” Since the SEC does not directly regulate Bitcoin, is painting the tape for Bitcoin illegal? Can something that does not promise anything of physical value to anyone be a Ponzi?

While it may not have started as such, I suspect Bitcoin has become a racket that is a hybrid of painting the tape and check kiting, but because cryptocurrencies are new the activity is not yet explicitly illegal. It may be the financial equivalent of a “designer drug.” Perhaps we will add a new type of scam to the lexicon. It might be known as a “crypto-kiting.”

madashellowell
madashellowell

"Where's the revenue? There is no revenue and no dividends. There is no interest paid. A stream of new investors is not required. " It would seem to me that the stream of new investors is those buying crypto.....why else is the price rising? The revenue would be those selling their inflated crypto. Buy for $1500, sell for $5000.....good dividend while still holding the bulk of your original investment.

TheCaptain
TheCaptain

madashellowell, there does not need to be revenue or dividends but there does need to be some underlying value. Where is the revenue or dividend for gold? There is none. So is it a Ponzi? At the end of the day value derives from scarcity. When the conquistodores brought back incan gold to Spain, the qty of gold in the region skyrocketed relative to the production. The result was a big drop in the buying power of gold. Of course, that stabilized over a few years, like a golden stone being thrown into a lake of molten gold. We are learning that gold is only made in supernovas or in the collapse of binary neutron stars. So it is rare indeed. The crypto known as Bitcoin has a limited number of units architected into its design but now there are many hundreds of cryptos, all of them having all the same benefits as the one known as Bitcoin. The only advantage of Bitcoin brand crypto is name recognition and thus liquidity. But there is no "gold-like" precious metal and all of the easy to find gold has been scooped up already. The simply aren't making any more of it. Cryptos can be made over and over again with little effort, just like any other worthless fiat currency. Bitcon (sic) will eventually become known as a mania, a flash in the pan. Gold and silver not so much. They have already stood the test of time.

JTRoberts
JTRoberts

I think it actually has a pyramid scheme architecture. The cost of mining escalates with time forcing the value up until it is no longer producible. Likely the concept was to create artificial depletion. In reality the iterations required to complete the last block change could be infinite.

MrPuzzleBox
MrPuzzleBox

Everything is a "BUBBLE". Consider it. Technologies emerge, grow(inflate), and eventually get replaced (shrink). So, Everything is a bubble. Bubbles aren't bad by merely existing. Those who imply so are trying to manipulate their hearers. Beware the liars...

Brother
Brother

Think non denominational piece of paper (blank) someone buys it for what they think it's worth.


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