Crypto is NOT a Ponzi scheme



Some crypto schemes openly advertised themselves as using a pump and dump methodology (with the implied premise that the people who the ads were reaching would be on the good side of the pump and dump - when of course almost all of them (or even all of them would not be)). John Oliver showed some of those ads on his discussion of Cryptocurrency (Cryptocurrencies: Last Week Tonight with John Oliver (HBO) - YouTube at 14:40).

I only follow two YouTube personalities because they are very informative and entertaining. Coffeezilla (who you linked to) and LegalEagle. (Coffeezilla even made an appearance once in a LegalEagle video to explain crypto stuff.)

You should take most things with a grain of salt on YouTube, but those places are pretty solid. Coffeezilla (who styles himself tongue-in-cheek as an “internet detective”) has actually been involved in busting real-life scams.

The New Yorker even wrote an article about him.

He’s pretty legit.

I do personally decry the conflation of “Ponzi scheme” with general financial scams, but some crypto groups do operate as Ponzi schemes.

Sometimes that is what is going on with cryptocurrency, though. An example is the “Save the Kids” scheme. (Another one that Coffeezilla helped expose, and was later sued for it.)

It was a scam from the beginning. They made a coin that they knew from the beginning was going to fail, just as you know a Ponzi scheme will eventually fail. They paid influencers to hype it up, and then when it went live, people bought in. Those people who bought in were inflating the price, which encouraged more investors, and more, and then those “in the know” who were part of the scam sold their shares, and the whole thing tanked. It was orchestrated from the beginning; it wasn’t a sincere attempt that failed. This is typically referred to as a “rug pull”, using the imagery of someone pulling the rug out from unsuspecting people who end up falling on their butts. It’s so ubiquitous among crypto schemes that many projects go out of their way to assure people that there is no rug pull intended as they start. (Even though often they are proved to be lying.)

The New York Times even wrote a recent article describing how these online Ponzi schemes are done.

I would agree with you that not all NFTs or cryptocurrencies are Ponzi schemes. There are many that are legitimate, and they succeed or fail while the people operating them are making a sincere effort to succeed. But it’s also true that many of them are. It’s an area where there are no regulations and many people get away with fraud without prosecution, so it’s inevitable that this sort of scam is going to be rampant.

I would summarize that cryptocurrency, of itself, is no more a Ponzi scheme than the Dollar or Euro is. But you can exexute a Ponzi arrangement with any of those, or tulips, or Beany Babies.

However, cryptocurrencies are prevalent in recent and ongoing Ponzi schemes because of how they facilitate the lack of transparency needed to conduct a Ponzi, plus the general enthusiasm and lack of understanding in the target audience.

I imagine that poor Arthur Ponzarelli is rolling over in his grave.

The Ponz! Aaaaayyy!

If the original Ponzi is watching, his main thought is probably: “Crapola! I was born a century too soon; I coulda made billions!”

As a slight aside, I’ve struggled with wrapping my head around cryptocurrencies for years–as have, I think, most people–until yesterday, when I read the description that makes it all click.

I get it now.

That reasonably describes the mining process.

Which is 100% irrelevant to crypto in general or bitcoin in specific when talking about using it as a currency or as an investment venue for speculation.

That’s kinda like saying if you understand intaglio printing you understand what US paper money is and how it’s used. WRONG!


Board wants a complete sentence.

And, you have to mine new coins in order to settle transactions, right? So, I wouldn’t say 100% irrelevant when talking about using it as a currency.

You do not necessarily have to “mine” new coins [Bitcoin], but you (or at least some users, intended to be all or at least the majority) do have to “mine” for the network to function. Also, an initial fixed number of coins are distributed that way. (A large amount of mining taking place in practice arguably indicates this is not suitable for a “currency”, as do the low settlement frequency and limited block size.)

If we invent some other currency scheme we must also decide where and how coins or credits exist— randomly appearing like in Bitcoin, distributed by banks in exchange for deposits, or something. Certainly this has some economic meaning.

@RitterSport: As @DPRK says, that’s an implementation detail.

There is no inherent reason coins must be created by a proof of work process. There is no inherent reason that transaction settlement and recordation must be tied to coin creation.

As he said, there must be some limit to coin creation rate (or more accurately coin existence volume) and there must be some motivation for entities to act as transaction settlers and record maintainers. The rest of the financial world handles these latter steps by the simple mechanism of charging transaction participants a per-transaction fee in some form or other.

The gold standard was a flop because the rate of creation of gold (which was then synonymous with the rate of creation of money) got out of step with the rate of growth of the real world-wide economy it was supposed to service.

Bitcoin had the opposite problem. In the early days, creating coin was easy but there was little demand for it. If bitcoin had become a mainstream medium of exchange by now, the mismatch between small supply of new coin and large demand for total coin would have been a problem. One that conveniently works to early holders’ advantages. Tying the two together was a smart idea. But only if you get the rest of the equations right & don’t black out the world trying to mine the next coin.

To be fair to Bitcoin, while the initial incentive to mine was getting a share of the limited amount of new coins, later on the incentive is indeed to collect per-transaction fees. The fees are not fixed, either—one may pony up a larger fee in order to ensure one’s transaction is posted faster (i.e., ~10 minutes), or because people have to in order to offset real-world mining costs.

Notwithstanding any of that, my observation about mining is that if it wastes energy and blacks out the world, that is proof positive it is simply inefficent. It would be instructive to compare the energy cost with that used by Visa or UnionPay or TARGET2 with many, many more transactions per second. One might argue that Bitcoin is special because of its peer-to-peer nature where anyone may anonymously spin up a node without having to be a central bank or certified financial institution, but the links I posted above indicate that consensus among a number of parties who do not trust each other and/or some of whom are actively malicious can be achieved without any “mining” whatsoever, even though protocol efficiency is admittedly a concern in any real-world massive-scale deployment (but you are never deliberately burning energy).

In order to reach consensus we either need to have some form of authority or some way for the users to what on what is a legitimate transaction or not.

The problem is that you need some way to decide on voting power. You could say each user gets one vote, but what is preventing me from just making up 10 million additional users and vote in their stead. How does the network know if they are legitimate or not?

So we instead have these pointless calculations. They take a long time to calculate and a short time to verify, and for now they are impossible to fake. So then I can’t make up 10 million additional users anymore, unless I have the computing power.

The other way of doing it is by dividing voting power by how many coins you have “staked”. This is the “proof of stake” method. That also cannot be faked.

I am really having trouble coming up with any other method that the network itself can verify. All other method seem to depend on information outside the network itself.

Crypto is clearly a greater fool scheme writ large. Although it is interesting that when you go to the wikipedia page for “Greater fools theory” you see this quote from legendary economist Burton Malkiel (bolding mine)

A bubble starts when any group of stocks, in this case those associated with the excitement of the Internet, begin to rise. The updraft encourages more people to buy the stocks, which causes more TV and print coverage, which causes even more people to buy, which creates big profits for early Internet stockholders. The successful investors tell you at cocktail parties how easy it is to get rich, which causes the stocks to rise further, which pulls in larger and larger groups of investors. But the whole mechanism is a kind of Ponzi scheme where more and more credulous investors must be found to buy the stock from the earlier investors. Eventually, one runs out of greater fools.

Crypto need not necessarily be a “greater fool” thing. But it lends itself to that and very quickly unscrupulous operators outnumber (and more importantly out-dollar) the folks trying to use it for legitimate ends.

I think all the existing cryptocurrencies are a greater-fool thing. For one thing, currencies shouldn’t be thought of as an investment, they’re for storing value, and the mania that’s surrounded Bitcoin and the others just doesn’t make sense.

I think the idea of a currency that is independent of any government/authority is a cool idea, it’s just that any of the existing cryptocurrencies have problems that make their use as a currency impractical. I’m wondering if that’s a fundamental problem that’s impossible to work around.

Such as?? Have any cryptocurrency found any legitimate uses yet? Maybe the El Salvador experiment?