Crypto is NOT a Ponzi scheme

I’m here to argue for keeping the meaning of Ponzi scheme to its original definition. It’s supposed to be a scheme where the money coming in is used to deliver fake returns to the earlier investors. One of the signs of a Ponzi scheme when the money stops coming in is no one actually has the investment assets they were told by the person running the scheme.

Crypto is not like that at all. If you buy Bitcoin, you have the coin. (Unless it’s stolen from you by a third party, which is still not a Ponzu scheme). Even if the value of Bitcoin drops, you still have the same coin you had before. Sure, Bitcoin could become worthless. But so could my BlockBuster stock. As long as people see value in an asset, it will have value. (Bitcoins value is a medium of exchange that is guaranteed to be created only at a certain pace and up to a certain point. How valuable that should be is a different debate.)

I realize market manipulation can feel similar to a Ponzi scheme, but it’s still not the same thing, and it just confuses the discussion. But it has important differences. In a Ponzi scheme, the person you give your money to is the one cheating you. But in market manipulation, often the exchange you buy your Bitcoin from is also being ripped off by the manipulators. These differences are important.

So please, lets keep our fraudulent scheme terminology straight.

You’re right. Crypto exchanges like FTX, though, are often Ponzi schemes.

So far, to me it looks like FTX was more of an unregulated bank that stole from its customers to make bad loans. But if you have evidence it was actually a Ponzi scheme, I’d love to read it.

We’ve had this discussion before:

There is a vague similarity in that they all follow the maxim that if you don’t know who the sucker is, it’s you. But pretty much all scams follow that in one way or another.

As noted, Ponzi Schemes are a specific type of fraud. The term is sometimes thrown around to mean any monetary fraud, which is incorrect. It came up in the thread on Crypto and FTX.Thanks, scarbrow, for setting the record straight.

You’re kinda describing a Ponzi scheme right there. Start with the red flag in the wiki:

While details of the crisis are still being revealed, public concerns began when a November 2022 CoinDesk article stated that FTX’s partner firm Alameda Research had a significant portion of its assets in FTX’s native token FTT.

And here’s that CoinDesk article

But even though they are two separate businesses, the division breaks down in a key place: on Alameda’s balance sheet, according to a private financial document reviewed by CoinDesk. (It is conceivable the document represents just part of Alameda.)

That balance sheet is full of FTX – specifically, the FTT token issued by the exchange that grants holders a discount on trading fees on its marketplace.


“It’s fascinating to see that the majority of the net equity in the Alameda business is actually FTX’s own centrally controlled and printed-out-of-thin-air token,” said Cory Klippsten, CEO of investment platform Swan Bitcoin, who is known for his critical views of altcoins, which refer to cryptocurrencies other than bitcoin (BTC).


Owners of the FTT token get discounts on FTX trading fees, increased commissions on referrals and earn rewards. The value of FTT is maintained by FTX’s rolling program of buying back and burning tokens, a process that eats up a third of the exchange’s trading commissions, which will continue until half of all tokens are burned, according to FTX.

So they invented a token for their own exchange and essentially paid dividends out on it. Those dividends came from new investors. It’s a literal Ponzi scheme.

I’m not a fan of getting information from videos but this one does a pretty masterful job of pointing out the moment when Sam Bankman-Fried explained exactly how his Ponzi scheme worked to a dumbstruck podcaster.

Sorry, but this is actually what I’m talking against. Inflating the value of an asset does not by itself make it a Ponzi scheme. It’s true that the box and the X token he describes in the video are basically worthless. This is just a penny stock inflation scheme. In the old days, a scammer would find a stock worth $.05, buy a bunch at $1, and convince people it was going up in price so fast they should buy it for $2. The mechanics of the fraud are different, and we should not confuse the 2.

Penny stocks don’t typically pay dividends. You’re missing that aspect of what FTX was doing and what yield farming is.

English does not really care what the original definition of a term was. Usage often broadens. In fact, it almost always broadens.

Crypto’s similarity to a Ponzi scheme is that later entrants are almost certainly doomed to see smaller returns than the originators. A second similarity, although crypto enthusiasts will hotly disagree, is that both are inherently fraudulent. Crypto is essentially worthless hot air being peddled as reality, which is also how and why a Ponzi scheme works. It would be amazing if the earlier term wouldn’t be applied to something that looks from the outside to be exactly the same in new dress.

The problem with crypto is not that it’s referred to as a Ponzi scheme. The problem is that it’s fraud sold by racketeers.

We can choose to use technical definitions or loose plain-English definitions. Generally, the latter approach is prone to error and misunderstanding. The SEC defines Ponzi schemes here:

People are less likely to be taken in by scams when they understand their nature in detail. Fuzzing out the definitions doesn’t accomplish that.

I hate to be the one to tell you this, but I’ve got some bad news about your Blockbuster stock…

If using the scare words “Ponzi scheme” keeps unknowing amateurs from investing in crypto, it’s all good.

Crypto as an idea is definitely not a Ponzi scheme.

But many crypto projects might be best described as such a scheme.

But a Bitcoin is not an asset either (until it becomes recognised for trading against an actual currency.)

Well that was true of the South Sea Company - Wikipedia, the Dutch tulip fever etc.
At present Bitcoin is risky and could become worthless - so I agree it’s market manipulation.

May I shortly ask here how the “Fried” part of Sam Bankman-Fried is pronounced? Is it like freed, but shorter, or like fried in KFC? /hijack

Well I can think of one crypto currency that definitely Was a Ponzi scheme.

The intriguing case of Ruja Ignatova and One Coin - the Crypto Queen.

She was a confidence trickster who sold a crypto currency by alliance with the operators in the Multi-Level Marketing businesses in many countries around the world.

The podcast The Missing Cryptoqueen is available on the BBC.

She was added to the FBI top ten most wanted in June. She is estimated to have made off with $1 Billion, which puts her up there with Elizabeth Holmes of the Theranos blood testing scam.

Just as crpto currencies have an underlying technology of block chain. Scammers use psychological techniques to convince investors that they are are the brilliant guru that can solve the worlds ills with some magical and mysterious technical marvel. This is the ‘madness of crowds’ and there are communities which are prone to it. In the case of finance, there are large parts of the world that have very under developed financial systems and they fall victim to these sorts of scams because of the importance of the foreign remittances and the money transfer market. Bypassing and improving on international money transfer seems to be the main business case of crypto currencies. Poor people working away from home have an interest in such services…and so do international criminals who want to move their ill gotten gains out of the reach of the authorities.

Cryptocurrencies are targeted by con artists and the financial authorities in developed economies are keen to regulate them and there is obviously an element of protectionism where the owners of existing financial systems are keem to protect their investment. This will eventually settle down when they find a way to make money out of it. You don’t hear many protests from the music and film producers these days about being robbed by evil people copying DVDs and music. They have gone quiet because they are making a lot of money out streaming services and leveraging their back catalogues.

This kind of syndrome is common when new technologies disrupt existing markets. They get targeted by criminals and suppressed by regulators acting on behalf of vested interests who benefit from the status quo and are not keen on change.

Crypto currencies will find application outside the frame work of existing regulation because there are many economies in the world that are isolated from the international financial market that enables to free movement of capital. A similar similar situation prevails with mobile payments using to transfer small amounts of captial using credits. These systems are finding a lot of traction in African countries.

Eventually this will settle down but it would be wiser to embrace these technologies and help countries move capital around easily rather than try to suppress these methods. At the moment we are in the prohibition phase and just a handful of countries have adopted a cryptocurrency in defiance of the international banking community and their national regulators. This will change.

But for now crypto currencies have a poor image and are targeted by scammers pretending to by prophets and gurus and robbing people of their savings. They do use confidence tricks and at least one was sold very like a Ponzi scheme. Ironically, Ruja never actually created a crypto currency. She found it was not necessary for her scam. She simply sold the idea and some ‘tokens’ for a crypto currency course and an exchange where they could be traded. This was enough for many investors for whom online accounts are a new and exciting innovation. Sadly many who lost money were people who were not at all rich and lived in very poor countries with little alternative financial infrastructure. That is a tragic.

On the other hand dabbling in crypto and trying to spot the opportunities and the scams is an engaging hobby somewhat like gambling. Entertaining, as long as you do not get addicted and lose your shirt. It has become a hobby for many during the last couple of years idleness during the lockdowns.

I think there is the potential for some decent movies to be made using some of these stories from the dark side of the crypto world.

I agree that cryptocurrency is not a Ponzi scheme.

It’s possible that Bankman-Fried (pronounced “freed”) was engaging in a Ponzi scheme to keep Alameda solvent, but, just like you can use regular currency or stocks or bonds to perpetrate a Ponzi scheme, it doesn’t mean that the medium itself is a Ponzi scheme.

To me, Crypto is a bubble, like tulips or some of those late 90s tech stocks that had literally no business plan. It’s a bigger fool investment – you only make money by finding a bigger fool to pay more than you did.

If it can find a valid use or some real backing, maybe it will settle into something that has some kind of value, like gold, but I find that unlikely.

Pity, fried like roasted would have been fitting.

But there’s also the pigeon drop, where the con is the sucker is told somebody else is the target and the sucker is part of the team that’s carrying out the con. So it’s possible to think you know who the sucker is but it’s still you.