We have been getting panicky emails in our mailbox by concerned readers about the latest developments of the Bitcoin price. Articles, even from reputable newspapers, are headliend by titles such as “Bitcoin is a Ponzi”. In nearly every article out there about “Bitcoin is a Ponzi scheme”, the term Ponzi isn’t explained.
When most of us hear about Ponzi schemes we think of some slick, smartly dressed mobster – including a hat – who dazzles unsuspecting victims with a smart sales pitch. He or she gets their victims to invest in so called “risk free” investments with huge returns.
Now it seems that most of these writers of these amateur-esque pieces either: fail to grasp the definition of a “Ponzi Scheme”, do not know what currency really is and completely fail on general journalistic and academic work ethics. However this will be tabled for later in this article.
What is a Ponzi scheme?
According to the SEC, a Ponzi scheme is: ”an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors to create the false appearance that investors are profiting from a legitimate business”.
Another source defines a Ponzi scheme as such: “A fraudulent investment scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns for older investors by acquiring new investors. This scam actually yields the promised returns to earlier investors, as long as there are more new investors. These schemes usually collapse on themselves when the new investments stop”.
So let us recap a bit shall we? Is Bitcoin an “investment”? No because it is a currency, which means it acts like any other currency in the world, fiat or otherwise. Does Bitcoin guarantee/promise huge returns like 50% profit? No, it does not do that. Again Bitcoin is just like any other currency in the world, only Bitcoin is near exclusively limited to the digital world. Is the pot of Bitcoins being held by 1 big fat cat that directs everything? No, since Bitcoin is a decentralised currency which means that it is controlled by the community. Have currencies dropped dramatically during the course of history? Yes they have. Currencies are not stationary but are always in motion. Look at the Deutsches Reichs Mark before World War II. There are more recent examples like the Russian Ruble, which lost much of its value.
Now I called Bitcoin a full-fledged CURRENCY, like most people in the crypto community. Now what is a “currency” exactly? The general misrepresentation is that currency was created to create debt. Some people proclaim that this is the only reason currency was created. Now we need go back to the roots of “currency”.
The Roots of Currency
In order to do that we need to go back to the earliest stages of human settlement and semi-settlement stages to explain. Before the 6th century BC there wasn’t any standardised currency system but a barter/trade system. Of course there were attempts of standardizing currency, like sea shell money, metal rods ( copper, iron) or dolphin money. The first coins weren’t actually viewed as payment method but as a status symbol. This meant that if you had one of these “coins” they told other people in society that you had done something important for the community and that the king/ruler of the city state honoured your work by giving you one or more of these “coins”.
Of course I’m talking only about the societies located in and around the Mediterranean Sea. Most of us forget there were other, sometimes more advanced societies out there like in the region we now call China or in Chile. There are others but for this article we will focus on the Mediterranean societies, because nearly everyone that writes these “Bitcoin is a Ponzi” articles is grasping back through history to these ancient times.
So getting back to our Mediterranean societies, when the minting of coins became much easier and the gold/silver/copper storages became more abundant, coins became more generally used as a universal standardised payment method. I will not bore you to tears about every little detail but suffice to say that the value of the coin back then was based on the amount of precious metal that is present in the coin. This was the case for precious metal coins like silver and gold coins. The copper coins were guaranteed by the city state that minted them (for good representations of copper coins you need to wait till 4th-3rd century BC).
Now most of these coins were used to have standardisation of trade values, which creates a certain stability in the city states/empires. Coins and currency had an additional use, namely to have a “fair” way to levy taxes.
Now the “debt thing” that some writers point to can be traced to Roman times where entrepreneurs could commission a ship being built on “loans” so to speak ( the same practice that is still being used here “the buy now pay later” is a variant). Usually such a ship would pay itself off in 1-3 trading trips, provided it didn’t sink. The person that ordered the building of the ships was written down on a scroll with the amount owed.
After the fall of the Roman Empire this practise more or less died out, until we arrive in the 11-14th century and onwards. A real spike in debt collecting and speculative financial products can be found from the 16th century till present day. The growth of banks and money lenders play a huge role in this development.
“Bitcoin is a Ponzi”
Now let us go back to the “Bitcoin is a Ponzi “ articles and expose their assumptions. There are many misconceptions, deliberate or not (maybe it is just pure incompetence on the writers part of such misguided articles), that have been .
1) < /span>Failure to understand what bitcoin is and label it as “not a currency”. We touched on this on the previous paragraphs. Most of these articles are written by self-proclaimed economic “geniuses extraordinaire”, though failing to grasp or explain what Bitcoin is. These self-proclaimed experts and couch potato “historians”, though only people who have an academic master’s degree in History may call themselves “historian”, fail to point to source material where they got that information or where they base their assumptions on. A first year university student knows that you ALWAYS need to put in references, even in articles. If you do not quote sources, your writings will be labelled as “a feeble opinion” at best and a “tabloid rambling” at worst. So without good and unbiased reference material your writings are worth nothing, especially when you fail to understand or even explain terms in said writings.
2) Ripping out historical events out of context and placing them in the present day events relating to Bitcoin. This is the most hilarious thing I have ever seen perpetuated by people that claim that they are “economic historians”. The first thing a first year university student that studies history hears is: “You need to extract yourself from the present and put yourself in the shoes of the people of previous times if you write about them. Their perception is different than our own….”. If you still do this, while proclaiming to be an economic historian, you either are lying through your teeth or the quality of your education is sorely lacking and as such the title of economic historian means nothing because you lack certain basic aspects.
I will give you an example about this practise so you can see what I mean. Mr. North is one of these self-proclaimed “economic historians” and has published such a text, or rather a rambling, since it has no objective information links whatsoever, in the kernel blog. He tries to link the Austrian theory about money, formulated in 1892, to current day developments anno 2015.
Mr North fails to put himself in the mindset of the 1890’s era, what an academic historian always does, which is his first mistake. The second mistake is that he doesn’t grasp what money is, how it has evolved and what it currently is. Most of our everyday currency is already digitised or “virtual”. In simple terms: The employer gives money from his bank account to the employee’s bank account. This happens digitally and as such our everyday currency is semi digital, since we also use coins and paper money of said everyday (fiat) currency.
Another of these laughable things in said blog is this one: “any time you see a proposal of a new form of money, hold on to your old form of money”. Well not so long ago the European Union decided to phase out the Francs, Gulden, etc. and implement a new currency called: the Euro. Again no footnotes or references given and with this sentence he only proves that what he doesn’t know scares him and that he isn’t an “economic historian” at all.
“Here is the Austrian school’s theory of money. People buy money because it has not fallen in price”. People don’t buy money because it is stable or fluctuate. People use money to buy everyday things and things they need. Money is a representation of how well/bad a said country does on an economic scale. If you come from the US and visit Europe you need to exchange your dollars for Euros. These “currency exchanges” have been practiced for a very long time now. Again this is evidence that Mr North is NOT an economic historian because ANY historian who writes articles, does research and will not say such laughable idiotic things.
3) Disregarding present day developments and news reports about Bitcoin, combined with no understanding about business, banks and financial sector. Here we can point to: the many interviews with bank managers, the people that work inside the banks but wanted their privacy protected by not using their names, the recent statements of credit card companies, the Microsoft CEO’s visions about Bitcoin in general, the FED announcements about etc. Mr. North is ignoring them completely and focussing solely on “so-called” proof that is very subjective and incorrect at best.
4) “People will not use Bitcoin because I say it is a Ponzi scheme”. This is the age old reply from people who haven’t actually understood nor have a firm grasp about the subject they are writing about. Most of these people do not even explain very well what they see as Bitcoin, Ponzi, or any other term. As such any intellectual “debate” is wasted on that those writings, or rants if you will.
Is Bitcoin a Ponzi? If we look at the official statements and descriptions about what a “ponzi” exactly is than we say it isn’t a Ponzi. Bitcoin acts and behaves as a currency does. Other currencies in the world can also be bought and sold on exchanges and at exchange bureaus.
We also have to look at what the big and small banks are doing. Most banks, even if they are vehemently speaking out “against Bitcoin”, they are looking at Bitcoin and the technology nonetheless. Ever since the digitalisation of currency (online bank transfers, online banks, credit cards etc) the innovation within the banking system has come to a halt, more or less. Bitcoin and all the technologies surrounding Bitcoin, like Blockchain, are new concepts.
Bitcoin is also behaving like a “world currency” and it is “a currency for the people by the people”. Everyone around the world can use Bitcoin to purchase items and products alike. This is the standardisation of currency, which I spoke off in the beginning of this article when I explained the history of currency.
Now is Bitcoin the “holy grail” of solutions that is out there? No of course not. There are many problems that have to be resolved. One example is the price manipulation on a huge scale, another are real Ponzi schemes where people offer 150% returns in 3 months’ time. Nevertheless, Bitcoin, and the technology behind Bitcoin, is better than what banks currently have and some banks have kind of embraced Bitcoin, like Fidor bank.
Bitcoin can be labelled as a currency since it behaves as such and answers to the general description of currency, which do not need to be coins or paper money to be named “currency”. It is also one of the best solutions we have so far that is more or less fair and transparent, while providing pseudo-a
nonymity. Only time will tell what will happen with Bitcoin .
Ponzi description SEC: http://www.sec.gov/answers/ponzi.htm
Ponzi description 2 + origins of Ponzi: http://www.investopedia.com/terms/p/ponzischeme.asp