Crypto is NOT a Ponzi scheme

Great Debates
61

I googled its stability, and the results were terrifying:

Crypto markets are in chaos once again, and the price of Bitcoin (BTC) has fallen more than 13% this week.

The cause of this week’s seismic disruption: FTX, the world’s fourth-largest crypto exchange, which used to be an industry stalwart.

Facing a rapidly worsening liquidity crunch, FTX is hunting for a solution to save the business. At the heart of the issue is FTX’s native token, FTT, which has been eviscerated in a huge sell-off, plunging more than 80% in the past few days.

FTX’s liquidity woes have spread contagion across the sector, as crypto investors fear another shoe will drop. Bitcoin (BTC) is weathering the storm but is still down more than 17% over the past five days.

No, thanks! :flushed:

62

There is a reason FTX (and other crypto firms) have moved to the Bahamas or Malta and other such havens.

They are free from laws regulating this. Wild west. Buyer beware.

Also highlights a problem seen around the world. There is always someone willing to make a deal for the business. US won’t do it? Fine…some little island is more than happy to ooblige.

The lure of fast, easy money is powerful.

63

You know zombies aren’t real, right? Besides, if civilization collapses, lots of things will become worthless. Computers, for instance. Believe me, without civilization the economy is the least of our problems.

US currency - any real currency - is real because the government says it is, but it has nothing to do with our agreement. Governments enforce that reality with laws, and back laws by sanctioned state violence. If we all came together and, collectively, agreed that dollars were worthless, the government would still demand that we use them to pay taxes, and punish us if we don’t. That’s what their value comes from - the barrel of a gun.

64

Are you seriously asking this?

65

My takeaway from reading this thread so far: The definition of a Ponzi scheme requires that the person at the top of the pyramid knows that he’s scamming.

And that’s the only thing that keeps crypto from legitimately being called a Ponzi scheme: that we don’t know what’s in the head of those early creators of it.

66

I’ve noticed that the term “zombie apocalypse” comes up with alarming frequency in discussions on cryptocurrency. Personally, I think that if you need to delve into the supernatural to justify your currency’s existence, you’re probably doing something wrong.

67

If there’s a local collapse of society (electricity goes out in Nantucket, and all contact with the mainland is lost), physical currency might still be used for exchange (at inflated rates) - it’s durable, countable, and impossible to duplicate, especially if people think that the larger society will eventually reestablish contact. Crypto is unlikely to be usable at all under such circumstances.

68

However, crypto relies on a distributed ledger that is beyond the control of any one country. The list of fiat currencies managed by an effective national central bank is a great deal smaller than the number of national economies. This is where a cryptocurrency can become relevant. The alternative is to tie the national currency to some more powerful currency such as the US dollar. That has a lot of political implications the US dollar is managed for the benefit of the US economy and no other. For a country with a failed national currency, a crypto currency offers politically neutral alternative.

Crypto currencies make sense at the fringes of the international banking system, filling the gaps. While the practicalities of it being a replacement for failed national currency have very few examples, it’s main application is in money transfer. The money transfer market is large. There are many immigrants sending remittances home and there is a demand for an effective and economic money transfer service. Crypto currency can provide that, but it dependent on exchanges. As we have seen, exchanges have fundamental weakness in that they are often unregulated and targeted by fraudsters who start operating as a bank or hedge fund, with dire results.

Are any exchanges regulated and simply provide a transfer and exchange service, I wonder?

For anyone living in a developed country with a mature banking and regulatory system, crypto currencies are just another high risk speculation. For someone working a richer country and who is trying to support a family back in a poor country with an undeveloped banking system, finding a way to send money home is a huge problem. There are plenty of places that Western Union, etc will not touch or change excessive fees. There are informal methods based on trusted couriers. Crypto currency based money transfer offers a big improvement.

Ruja Ignatova, the ‘Crypto Queen’ targeted modest investors in poor countries with her Ponzi-like promotion of One Coin and its dodgy exchange.

Sam Bankman-Fried seems to have targeted institutional investors, who really should have known better.

When new technologies come along, they are often adopted by fraudsters trying to cash on the enthusiasm for the latest ‘wonder of the age’. A hundred years ago it was electricity, X-rays, Radium pills…there was a cascade of new inventions and high hopes for investors looking for high returns. These days it is AI/Big Data, Crypto, Quantum, etc and there is the global rumour mill that is the Internet providing convenient echo chambers to convince the gullible to part with their money.

It takes a while for a new technology to develop and find its place, if it is at all viable. So it is with Crypto and its underlying technology, Blockchain. Blockchain will find use where slowly changing transaction databases are relevant…as long as someone solves the surrounding community of interest regulation issues. Crypto currencies are interesting experiments and there is much to learn about how the connectivity of the global Internet might be used for new applications. There has to be something more than simply consuming endless media confections and gossiping with friends and slating enemies - right?

69

I do not see why any immigrant would pay ~$100 to some shady exchange to send remittances home, when there is already an effective and economic money transfer service that does not depend on exchanges or banks:

70

That is dependent on an established trust network, which may not be available to everyone. If you are outside of that trust network, you pay top dollar to an agent.

71

Not really. It just has to be a scheme where new investors are used to pay out to existing investors. So, I tell people they will make 10% on their investments. The first people give me $100, then the next people come in and I use their money to pay the first people $10, then the next people come in and I use their money to pay the first two sets, etc. That’s a Ponzi scheme.

Sometimes they develop sort of innocently when, say, a manager over promises and thinks, if I can just get some more money, I’ll make enough to pay everyone back.

Crypto is more like a tulip-style asset bubble – a craze that takes something essentially worthless and inflates the price. The thought being, if I buy it, and it goes up, I’ll sell it to the next guy – it’s always going up! I can’t lose!

72

Tim Bray’s story from his Amazon days addresses all the points here.

A few highlights.

The answers, to our disappointment, failed to shatter any preconceptions. The things they wanted to do were perfectly reasonable. Some of them were damn exciting. They all needed databases. They could all make use of ledger-like data structures, also cryptographic hashing and signing. But, um, why did they need blockchain? Severe lack of clarity on that.

Up until this year, most of my conversations with crypto promoters have had problems. For example “This person thinks proof-of-waste is OK and thus can be safely ignored.” And “This person is pretending that the proportion of crypto biz that is actually Ponzi doesn’t round to 100%.”

He’s more nuanced on the subject, but that’s where he comes down. Some commenters are positive about crypto and present several use cases that might show potential, although they don’t make convincing cases that blockchain is required.

I understand why believers don’t want anyone to apply Ponzi scheme to crypto since that implies deliberate fraud from the beginning. Yet calling it a tulip bubble is too obscure for common usage and referring to it as libertarian masturbation is too crude. (Bray: “they seemed mostly concerned with the aspects that got you out from under troublesome government regulation and contract law; it all had an unsubtle aroma of libertarianism.”) It might be different if crypto were a good thing perverted by charlatans. The charlatans are certainly evident; the good thing not so much.

73

Tesla or Apple are like tulips; vastly overvalued, but there is underlying value. (You will notice that even after the tulip market crashed, there are still tulip growers, a whole industry)

Bitcoins you can’t eat, grow flowers from, pay your taxes with, or anything at all. It is purely based on speculation, hoping for a bigger fool.

I am wondering how much normal money was actually spent, I suspect the actual money in the system is only a tiny, tiny fraction of the often touted “market cap”.

74

I guess my point was that what you’ve described here also describes cryptocurrencies pretty darn well IMHO.

75

There is no inherent promise from a cryptocurrency of a return on investment. Particular people may have (fraudulently) made that promise, but the underlying technology just enforces a special kind of scarcity.

76

Could you unpack this some? I’m of the opinion that while cryptocurrencies are the kind of thing that enables scammers to perpetrate Ponzi schemes, and that much of the desire for a lack of regulation in the crypto community has to do with that, that crypto itself is no more likely to create a Ponzi scheme than any other opaque, unregulated money substitute.

77

That’s when it becomes a Ponzi scheme though. It has become the norm for crytocurrency creators to seek out influencers to promote their particular coin so that it gets attention and buyers at launch.

Again, it’s not that every cryptcurrency is always created as a Ponzi scheme. But the majority of them are. The ones that last and continue to be useful are rare. For every Bitcoin or Etherium you have many come-and-go coins where the only people who make any money are the people in on it from the beginning.

78

By raw quantity? Sure, that’s plausible. But that’s just a function of the fact that the market only has room for a very small number of “legitimate” cryptocurrencies, and all the thousands of the remaining ones are some form of pump-and-dump scam.

Bitcoin+Ethereum are, by market cap, a large fraction of the total market. And while there’s plenty of fraud in that space as well, the currencies themselves aren’t really subject to that kind of scam. So as a fraction of the total money moving around, pump-and-dump fraud is a relatively small portion. As a fraction of the total number of currencies, where a “Global Funeral Care SaleToken” is considered equal to Bitcoin, it’s almost certainly extremely high.

79

So maybe it’s fair to say the “major” cryptocurrencies aren’t Ponzi schemes.

80

If you go by their own description maybe.

But if you are looking at the actual situation:
The effects look very much like a ponzi/piramide —I know the difference- crypto just combines so many aspects of both.