Is Bitcoin (BTC) a Ponzi Scheme?

At the present time, Bitcoin Core (BTC) is very much like a Ponzi scheme, because the exodus of existing investors is only prevented by a hope that the price will go up, which in turn is sustained by the new money of new investors (who happen to be misinformed and allured in by a wrong narrative, another hallmark of a Ponzi scheme).

But the above criterion alone may be too inclusive, because it would make a lot of speculative investments including stock market look like a Ponzi scheme as well.

According to a definition by Oxford Languages, “Ponzi scheme is a form of fraud in which belief in the success of a nonexistent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors.”

The keyword is “enterprise.”

The real sign of a Ponzi scheme is that the perceived enterprise is nonexistent.

The relevant enterprise of course is not just any enterprise, but one that conducts real economic activities to generate actual economic value (other than an appearance of a return itself) to support the investment return.

It is on the ground of “enterprise” where BTC is shaky, because the entire BTC system generates no economic value other than investment return itself.

Even worse, if you understand the design of BTC and the promoted narrative such as “digital gold”, it is clear that BTC does not even pretend to generate real economic value other than the investment return itself.

But bitcoin is hard money…

In a recent interview on Stansberry Research, Max Keiser touted bitcoin’s antigovernment feature, and explained why bitcoin is not a Ponzi scheme.

The reason why bitcoin is not a Ponzi scheme, according to Max, is because it has a halving every four years, and as a result, it is noninflationary hard money.

By “bitcoin,” he was of course talking about BTC only. (For those who are interested in the real bitcoin which is being built on a much more solid ground, look into Bitcoin Satoshi Vision — BSV. See BTC and Bitcoin, what is the real difference?)

Using halving as a proof that BTC is not Ponzi scheme is laughably illogical. It makes Max sounds like he does not understand what a Ponzi scheme truly is, even though he stated it correctly. A statement is only a statement, anyone who has some memory and a reasonable linguistic capability can do it. Understanding the substance of a Ponzi scheme according to its real mechanism, and applies it correctly to real-life examples, however, is another thing.

The truth is, BTC is a Ponzi scheme, unless the following has happened: BTC has separately created an economy of real value at a scale commensurate to BTC’s full valuation.

Applications such as Strike built on Lightning Network are trying to do just that. Blockstack (STX) is another attempt. If applications such as Strike and STX that are built upon the top of BTC become collectively successful, so successful that they provide a solid support to the entire valuation of BTC, then BTC would no longer be a Ponzi scheme anymore.

However, despite the skyrocketing price of BTC, the BTC Bitcoin Network itself is still almost useless other than mining BTC coins. The network is slow and expensive. Lightning Network, a layer-2 solution on top of the Bitcoin Network, is fast and cheap, but its security, reliability, stability and even legality have not been proven yet. Year 2021 will put it under the light, as other competing networks are coming up and some of them have much more competent and sound applications.

As said, as long as the exodus of existing investors is only prevented by the incoming new money poured in by new investors, it is a Ponzi scheme.

Not only does halving not prove BTC is not a Ponzi scheme, but in fact it inherently creates a constantly growing pressure to break the Ponzi bubble. Every four years, the number of coins rewarded for mining is reduced by half, and because BTC network generates negligible transaction fees (not because the cost per transaction is low but because BTC can only process an extremely small number of transactions per second, by design), the only way to ensure that the miners will continue to mine is that the BTC price continues to go up, forever. But price cannot go up forever, and therefore BTC is destined to fail by design. (In contrast, BSV is designed to process exponentially increasing number of transactions to generate transaction fees which eventually substitute the mining rewards.)

BTC has zero real economy at the present time. A near trillion dollar asset/stock that has zero real economy to support it, just think about it.

While most BTC buyers and holders have no sense of this peril, smart ones in the BTC community do still hope that BTC will be eventually transformed out of its Ponzi state, because they know how it will end if it’s not.

Most Ponzi schemes are not designed to cheat from the very beginning, but are created out of greed or over-optimism, and held on with a false hope that it would be eventually transformed out of the Ponzi state and become legitimate. Some actually work out that way, and investors would be lucky, but many will hold onto the scheme until it can no longer hold, and the scheme bursts. BTC is following the same pattern.

Will applications such as Strike and STX be so successful to create such a large-scale economy to support BTC?

At the current BTC valuation, that is a very tall order. A billion-dollar economy in a few years, hard to achieve but at least conceivable. But a trillion? It is up to you to decide (or speculate).

But it’s been over 12 years…

A Ponzi scheme could last over a decade (in certain cases decades), and go as far as successfully deceiving a large percentage of the mass. BTC is getting there.

But due to the hard laws of economics, they always end, badly for the greater part of the fools, but fortunate to the world as a whole.
 
At least in theory, it is very easy to differentiate a Ponzi from a real economic project:

A Ponzi does not create new value; it only creates an appearance of “value” in a higher price by absorbing money from more people’s foolish contributions.

In contrast, a real economic project, by both design and execution, creates new things (products or services) that actually have intrinsic values other than investment returns.

Do not confuse price with value. The price is what you pay for value you perceive to exist.

Once you understand the basic principles, it is not difficult to see that BTC is a Ponzi by definition, and that many other blockchain projects, although not a Ponzi by definition, have been made into one anyway.

At the same time, one should also be able to spot the very few blockchain projects that are creating a real economy. But doing so is not as easy because the real economic effects being produced by these blockchain projects are still too small to be felt at the general user end, so only those who do deep research and have the ability to understand the technology and economics on theoretical terms without first seeing the concrete results.