Is Harald right? Is $BTC (+0.71%)
a Ponzi scheme?⛄(866845)

Thanks for your contribution @Madhatter5566 !

With this post I would like to take the opposite position once again and express my opinion. If you missed Harald's post today, you should read it before this post to know what it's about: https://getqu.in/duSdcl/

What is a Ponzi scheme?

Definition according to Harald's Wikipedia article:

"A Ponzi scheme or pyramid scheme is a business model that requires a constantly growing number of participants to function, like a snowball rolling down a slope and constantly growing. Supposed profits or returns, or rather liquidity surpluses, are generated almost exclusively by new participants in the system contributing or generating their own capital. Sometimes there is no product at all or only an overpriced product, making it a fraudulent offense."

The following core elements of a Ponzi scheme can be derived from this definition:

(1) The need for a constantly growing circle of participants: The system only works if new participants are continuously added.

(2) Profits from the capital of new participants: The returns of existing participants are mainly financed by the deposits of new members.

(3) Missing or overpriced product: Often there is no real product or the product offered is overpriced and only serves as a pretext.

In addition, the following characteristics of a Ponzi scheme are mentioned to distinguish it from a Ponzi scheme:

(1) Typical "incentive": High profits through a one-time investment in order to subsequently distribute the product yourself. The Ponzi scheme is often not a genuine product that is usually traded. It is often only permitted to sell the "product" to customers who are also distributors or want to become distributors.

(2) Payments: One-time or recurring participation fees. The profits come from the new customers that you have recruited yourself.

(3) Interaction with the founder: Interaction with the founder sometimes does not take place. New investors are recruited at all levels of the pyramid scheme.

(4) How it works: Fees from new customers finance the success fees of current participants.

(5) Collapse: Fairly quickly, because in order to maintain the system, a multiple of new customers must be acquired at each level.

Now that we have clarified the core elements and characteristics, we can take a step-by-step look at the extent to which Bitcoin fulfills these characteristics.

Applying the core elements of a pyramid scheme to Bitcoin:

(1) Need for a constantly growing pool of participants

• Ponzi scheme: The system continuously needs new participants to finance the profits of existing members. Without a constant influx of new members, the system collapses.
• Bitcoin: Bitcoin is a decentralized network that functions independently of the number of users. The functionality of Bitcoin does not depend on a constantly growing number of participants. Even if the number of users stagnates or decreases, the network remains functional and does not collapse. This is ensured by the "Bitcoin control loops", which I have already presented in detail in another article. But to explain it very briefly: the miners are service providers. They expend energy to confirm user transactions or to include them in a block. If the number of users and therefore the volume of transactions falls, it will be even more difficult for miners to continue operating their business profitably than it already is. As a result, some unprofitable miners will (have to) take their devices offline, causing the hashrate to fall. As a result, the blocks are confirmed more slowly. After 2016 blocks, the so-called "Difficulty Adjustment" takes place and the difficulty for mining is corrected downwards. As a result, mining becomes more profitable again for all other miners. The network therefore stabilizes itself and does not collapse.

(2) Profits through capital from new participants

• Ponzi scheme: The returns of existing participants are mainly financed by the deposits of new members. There is a redistribution of funds from new to existing members.
• Bitcoin: When buying Bitcoin, a buyer exchanges his money for a digital good on an open market. There is no central authority that collects deposits and distributes profits. Profits or losses are created by market movements based on supply and demand. There is no direct financial link between new and existing Bitcoin holders, and the gains of some are not necessarily the losses of others. To argue that the previous buyers benefit from the capital of the new buyers is of course indirectly true, but it is the same for any other asset traded on the market.

(3) Missing or overpriced product

• Ponzi scheme: Often there is no real product, or the product is just a pretext and is overpriced. The actual value of the product is low or non-existent.
• Bitcoin: Bitcoin is a trustless, fair, censorship-resistant, democratically regulated network with a real benefit for many people worldwide. That is a fact. Just because you don't recognize this benefit for yourself doesn't mean you should conclude that everyone else does. Bitcoin enables peer-to-peer transactions without a third party. We here in the western world have an easy time discussing whether we see Bitcoin as an asset or store of value or whether it could be a currency - or a Ponzi scheme after all. Unfortunately, the majority of people live in autocratic/dictatorial regimes - sometimes with high double to triple-digit inflation rates. For these people, Bitcoin is not an alternative, it is a necessity. For anyone who doubts this, I can warmly recommend the book "The Trojan Horse of Freedom" by Alex Gladstein, CEO of the Human Rights Foundation. The whole book, from cover to cover, is about how people around the world are using Bitcoin to protect themselves from oppression and how Bitcoin offers them the chance of a better life.

Applying the additional features to differentiate it from Ponzi schemes:

(1) Typical "incentive"

• Ponzi scheme: High profits from a one-time investment to then distribute the product itself. Often products may only be sold to people who also want to become part of the scheme.
• Bitcoin: There is no distribution structure or obligation to resell Bitcoin to others or recruit new participants. Anyone can buy or sell Bitcoin without being part of a network or distribution system. There is no compulsion or financial incentive to get others to buy Bitcoin.

(2) Payments

• Ponzi scheme: One-time or recurring participation fees. Profits come from the new customers you have recruited yourself.
• Bitcoin: There are no participation fees or membership fees to use or purchase Bitcoin. Profits or losses result from the individual decision to buy or sell Bitcoin at a certain price. There is no mechanism to profit directly by recruiting new participants.

(3) Interaction with the founder

• Ponzi scheme: Interaction with the founder sometimes does not take place. New investors are recruited at all levels of the system.
• Bitcoin: Bitcoin was developed by a person or group under the pseudonym Satoshi Nakamoto, who has not been active since 2011. There is no founder who actively recruits new participants or controls the system. Bitcoin is open source and is further developed by a global community of developers and users. The claim that Satoshi Nakamoto enriched himself as the head of the "Ponzi scheme" remains just that: a claim. In reality, Satoshi's coins have never been moved, which speaks against his intention to enrich himself. Furthermore, there was no premine in Bitcoin, which I tried to explain to Harald - but he obviously misunderstood. Satoshi mined the first Bitcoin block, the Genesis block. However, it was designed in such a way that there was no block reward of 50 Bitcoin at the time. So he didn't "earn" anything with it. He then waited 6! days until other network participants joined in and mined with him. From then on, Satoshi also continued to mine. This means that all Bitcoin was mined in a market-based process. The coins were not created behind closed doors, as is the case with Ethereum, for example. I am also not claiming that ETH is a Ponzi scheme - I just wanted to use this as an example for Harald.

(4) How it works

• Ponzi scheme: Fees from new customers fund the success fees of current participants.
• Bitcoin: There is no structure in which fees from new participants flow to existing users. Transaction fees are paid to miners who secure the network and not to other Bitcoin holders. The miners provide a real service by verifying transactions and securing the blockchain.

(5) Collapse

• Ponzi scheme: The system collapses fairly quickly as multiple new customers must be acquired at each level, requiring exponential growth.
• Bitcoin: Bitcoin has now been around since 2009 and has seen numerous ups and downs. It does not depend on the recruitment of new participants to function. The network is robust and dynamically adapts to the number of active miners and users because of the control loops.

Summary and conclusion:

Based on the above points, in my opinion, Bitcoin does not the criteria of a pyramid scheme. Here are the main reasons again:

• There is no central authority or organization that recruits new participants or profits from their deposits.
• The viability of Bitcoin does not depend on the constant recruitment of new participants.
• Bitcoin offers a real benefit as a trustless, fair, censorship-resistant, democratically regulated network
• Bitcoin is traded on open markets and the price is determined by supply and demand.
• There is no mechanism by which funds are redistributed from new participants to existing ones.

Finally, I would like to briefly address the valuation issue that I think Harald was getting at:

Bitcoin has no intrinsic value. This may come as a surprise to some people, but I agree with Harald. According to the Austrian school, however, this "intrinsic value" does not even exist, as value is ALWAYS subjective. If I subjectively estimate the value of a good to be higher than its market price, I am prepared to buy the good. The seller, in turn, only sells the good if he subjectively estimates its value to be lower than its market price.

Bitcoin does not generate any cash flow, which is why it must have an intrinsic value of exactly 0 from a traditional financial perspective. This is why many economists find it so difficult to attribute a value to Bitcoin.

However, Bitcoin does have intrinsic properties that make it valuable. I have presented some of these in this article, for example: https://getqu.in/G8t0Nm/

I hope I have now been able to give you my view on the subject. This has caused heated discussions between myself, a few others and Harald in various threads here over the last few days.

I think it's great that Harald has written a constructive contribution regarding his views. That deserves recognition - I wouldn't have expected it.

And I didn't want to just clumsily point my finger at a few of his arguments and claim that they are nonsense, but rather consciously try to take a constructive counter-position.

You can and should all form your own opinion on Bitcoin. Under no circumstances should you invest in something like Bitcoin because there are people like me who keep publishing articles about it - instead, you should form your own opinion according to the motto "Do your own research" and make your decisions based on this. To do this, it is also important to listen to controversial opinions from different people.

Conclusion: I also leave it up to the reader :D

Have a nice day!

#bitcoin