IS BITCOIN A PONZI OR ANOTHER FANCY SCAM?

8 min readMay 7, 2021

Some months ago, I was having a conversation in a book club, in that chat, a prominent and respected community member remarked.

He said, “I think there are a lot of subtle Ponzi going on in the financial market.”

He read about the Game Stop saga, the battle between some hedge funds and Wallstreetbets. It was a historic fight between the shorts and longs in the financial market. As it turned out, Wallstreetbets gained massive support, Reddit was on fire, they won the battle and the hedge fund was short-squeezed, hence, declaring bankruptcy. After witnessing this historical event as an outsider, and seeing people talk about bitcoin and cryptocurrency, it is easier for him to conclude that bitcoin is like Ponzi.

He said “If this is what these hedge funds do, is it not Ponzi? And it is legal.”

This is a reasonable question from a sound mind especially when cryptocurrency trading is viewed at the surface level.

For a very long time, the Ponzi scheme has been around, it is a kind of investment that is based on a pyramid, its propagators give fake promises to their victims. People fall for a claim that they will get a constant return on investment by taking no risk. The Peters (Those that joined early) are robbed to pay Pauls (the late-comers). Always, the lifespan of this scheme depends on new clients that join to invest. So they encourage investors to invite co-workers, friends, and family. Those at the bottom of the pyramid suffer, they will eventually lose their money. This is how Ponzi works in any part of the world.

Similarly, the founder of Barstool Sports, Dave Portnoy, who is now a stock market trader opined that bitcoin is just one big Ponzi scheme.

In his opinion “you get in, you just have to not be the one left holding the bag. It is no different from the stock market. Everyone is pumping their own [coin], alright.”

You may want to agree with Mr. Portnoy, because the bitcoin dollar value dipped from about $20,000 to less than $4,000 in the past. As of the time of putting this article together, bitcoin is currently trading between $55,000 and $58,000. Despite the recent success and increase in global adoption, some critics are still convinced that it is a Ponzi, and they advise against investing money into it.

LendingTree chief editor, Tendayi Kapfidze in a conversation with Yahoo, said “You only make money based on people who enter after you.”

The critics will go on to say that bitcoin has no utility and investors are trying hard to discover real use cases for it. Bitcoin is like a solution looking for a problem to solve. So, for these reasons, the price is purely based on speculation, it is not much different from Ponzi.

To be honest, people must buy and hold, more people need to keep buying bitcoin to drive up its value in the market. To sustain the upward price action, there must be more buyers than sellers in the market. Otherwise, it will dump so hard. This simple act is the fundamental law of demand and supply, it applies to cryptocurrency, stock, forex, gold, silver, rice, and every other commodity. If the application of this concept to bitcoin and other cryptocurrencies is the reason why it is called Ponzi, then it could be safe to say that S&P 500, gold, and silver are Ponzis.

If Bitcoin Is Not Ponzi, What Are The Differences?

The future price of bitcoin depends on its use cases, and it is fast losing relevance as a payment solution due to low speed and scalability problems. But people and institutions now use it as SoV (Store of Value), they buy and hold it with the hope that other investors will buy at a higher price. The approach is evident in Tesla’s decision.

Elon Musk and his team decided that it is safe to keep $1.5 billion in bitcoin than handling it over to the banks. It is a new reality and a lot of companies and billionaires are taking massive advantage of this decentralized financial revolution. Now that Bitcoin is a safe haven asset, isn’t it wise to compare it with other assets? It is more important to see it in the light of digital assets.

Would You Say That Stocks Are Ponzis Because It Value Fluctuates?

Quickly, here is the similarity; nations and companies buy gold with the same hope that it will protect their wealth against inflation, and BTC does the same thing to value that is stored in it. Bank of America named it the single best investment of the last decade.

If this remark from the American apex bank is true, why do you think that bitcoin is a scam or Ponzi?

Bitcoin value could rise as high as $1,000,000 per BTC, and it could fall as low as $1 if people stop believing in it, and they stop buying it. It seems most people don’t know much about Ponzi, here is a piece of important information for you.

Here Are What You Don’t Know About Ponzi

It involves some deep level of secrets, except you are a core part of the scam gangs, you probably don’t know for sure what people’s money is used for. Their nefarious activities are complex and most of them float unregistered investment companies. The peddlers of Ponzi tell lies to the victims, they promise overly consistent returns on investment without a legal framework. Most of their clients, at a point in time, will have difficulty in withdrawing or receiving their earnings. Bitcoin is not in the same class as this kind of investment.

How Is Bitcoin Different?

It is open and transparent, anyone can see all transactions on its blockchain because its code is open source. It is serving the purpose of banking the unbanked citizens of this world and helping them to facilitate borderless transactions in a secured way. There is no complexity in the bitcoin network, millions of developers have access to its codes, they can engage and fully understand its cryptography. Bitcoin is highly transparent and you can view its codes even if you know nothing about computer programming.

What about unregulated cryptocurrency exchanges?

Some people claim that bitcoin is an unregistered investment. Does money get registered in countries? No. Bitcoin is another form of money like gold, silver, and cowry. The confusion lies in the fact that its value is measured relative to other currencies like gold, dollars, pounds, euros, naira, and so on. Right now, in some western countries, BTC profits are now taxable, this is a subtle way of informing other citizens that it is now a registered asset class.

When consistent profit is promised, know that Ponzi is involved. Most people that invest in Bitcoin made massive gains in 3–4 years of hodling (same as holding) it. Now, it is evident from BTC chart that the bear cycle lasts for 3 years in the cryptocurrency industry, during this period, no one can make consistent ROI.

Bureau de change are licensed sellers of currencies in many countries, for this reason, some financial experts say that bitcoin sellers are unlicensed. About 5 years ago, almost all unlicensed exchanges got hacked, this event naturally removed top unsecured trading platforms from the scene. Today, most cryptocurrency exchanges are licensed by the country where the headquarters is located. This increased investors’ confidence in the industry and institutional investors are now able to participate in the cryptocurrency market.

Is There Issue With Liquidity?

Unlike Ponzi where people may have problems with payment, for almost a decade, bitcoin does not have a liquidity challenge, and the problem of transaction speed is now addressed by Lightning Network and Tokenized BTC (also known as wrapped BTC). Users and investors can convert their coins to fiat instantly in most countries.

Additionally, you can trade without exchange via peer-to-peer transaction, and bitcoin ATMs (Automated Teller Machines) are on the rise in some parts of the world. Market capitalization is now over $1 trillion, and liquidity is no longer a problem.

To Wrap It Up

The world’s financial technologies are evolving at an unprecedented pace, and decentralized digital currencies are at the forefront of this revolution. This is the first time in history that money was created by the people and not the government.

However, the governments will fight what they cannot control, but it is hard to shut down all nodes on the bitcoin network at the same time. It is a currency that is not backed by gold, but cryptography that requires massive computing, and people believe that Bitcoin can give true financial freedom to everyone.

The borderless transaction has never been possible without banks and central authority. Bitcoin has eliminated all middlemen that could stand as obstacles in the digital economy, and this alone is the best use case that any currency can have.

Next time you are told that bitcoin is a Ponzi scheme, you are now empowered to make a strong case in support of bitcoin. Similar to how other fiat currencies can be used to sell Ponzi to people, cryptocurrency, being a medium of exchange, is not an exception. When the dollar is used for this scheme, does it make dollar notes a Ponzi?

No.

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About the author

Ojeniyi Ayobami Abimbola has been trading cryptocurrency since 2015, and he is a blockchain content creator, and a crypto coach at Cryptoniche. You can connect with him on:

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