Bitcoin
$10,160.69 -0.94%
BTC · 6d

No, Bitcoin isn't a Ponzi

A common accusation toward Bitcoin: It’s a pyramid scheme. For BTC holders to profit critics claim it’s necessary to sell to other “suckers” at an even higher price. This is fundamentally wrong.

Anatomy of a Ponzi

A Ponzi scheme is an investment scam promising outrageous returns with little risk. Similar to a pyramid scheme, early backers profit from new investors. When investors stop joining the scheme collapses.

Some examples of historical Ponzis include the ones perpetrated by Bernie Madoff and Allen Stanford, which used finance firms as fronts to con people out of billions. Notable crypto Ponzis include BitConnect, OneCoin, and Plus Token.

Critics, like Nouriel Roubini, are adamant that Bitcoin is a Ponzi. For early adopters to profitably unload their cheap Bitcoins it’s necessary for them to bring in new investors, he claims. These early adopters have a vested interest to tout Bitcoin and get other people to buy into the technology.

And, with Bitcoin cheerleaders like Anthony Pompliano and Rhythm Trader—who likely have conflicts of interest via large holdings—it’s easy to understand why an outsider may think bringing in new “fools” is necessary.

Greater fool theory

Bitcoin’s mischaracterization as a pyramid scheme is closely related to commonly-held belief that its success depends on the “greater fool theory.” The greater fool theory applies to assets which are priced based on the irrational expectation of profit by future market participants rather than the intrinsic value of the asset.

Said simply, greater fools are people who buy an asset because they believe they can turn around and sell it to someone else for a profit, who then sells it to another fool for a profit, and so on, until the bubble pops.

Some examples of assets that relied on the greater fool theory include the Beanie Babies craze of the 1990s, precious metals like gold, and other collectibles like CryptoKitties.

Another prime examp...

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