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  • Writer's pictureJason Ellis

Digital Currency / Coins: Pyramid or Ponzi - Both? Neither?

I have been pondering this at length – Is bitcoin (or any of the alt-coins) a ponzi or pyramid scheme?

I personally like to look at coins as an investment, but many people decry that coins in any form are a ponzi or pyramid scheme. A waste of money, time and effort and will only serve to give criminals a way to transfer money back and forth in secret.

Well.. Okay it’s hard to argue with that last one as the whole point of coins is to be a currency free from government oversight, so yes criminals will likely use it. But if there is value to them and the current state of bitcoin implies there is, it’s certainly not a waste of time and money. But I get ahead of myself.

A lot of people are saying that coins are simply a pyramid scheme or a pump and dump ponzi. I agree and disagree.

Firstly, All of the coins, no matter which you decide to go with, favor early adopters which is one of the typical hallmarks of such schemes but so does any investment really.

Is it a pyramid? I would agree that all of the crypto-currencies are way more volatile than most mainstream investments, but I don’t think its quite a pyramid.

Pyramids or any multilevel marketing scheme as I understand them work such that everyone at the top is a direct beneficiary to the new people coming on board. As each new level is created, the rich at top get richer on the backs of the newbies, and typically there is a point at which all those people at top bail leaving the rest with nothing.

That’s not what's happening here. The fact that I’m mining coins has zero effect on the people that came to it before me and in fact the opposite is true. By my mining coins, I’m actually devaluing the coins already mined..

Coins by their very nature are a 100% deflationary currency. That means that the more of it that is mined the less value the amount you already have has. In theory each coin has a finite amount but each coin handles that upper limit differently and I know some coins have no upper limit.

To give an example bitcoins have a max of 21 million coins, there can never be more than that. As more coins are mined the value of the coins you have go down due to supply and demand, and in the case of those coins with no upper limit your coins could become worthless over time just due to the flood of coins on the market, though that would take a long time due to the difficulty increases imposed on mining over time.

In many ways, coins are more like the stock market than a pyramid, if I buy coins (which I have ZERO intention of doing btw) I’m increasing the value of the coin, just like the stock market. Google stock was $85 back when it was new, now its $1220. It’s worth that much because people valued the company enough to buy the stock making the stock hard to get, causing the stock value to go up.. supply and demand 101.

With coins however there is this added injection of units through mining where as with stock typically the only way for more stock to come into being is through stock splits or secondary offerings.

The primary difference is in the backing and I see the sticking point that a lot of poeple have trouble with; Most argue that google stock is backed up by a company, where as coins are backed up by the hopes, dreams, and wishes of the neckbeards and fedoras who think they are the smartest people in the room. And not much else.

They have no intrinsic value unlike pelts, skins, beads and shells of yesteryear or the modern currencies backed up by whole nations. They are valuable entirely because people say they are.

The question is, is that enough? I dunno. I’m skeptical. I think it’s likely not over the long haul, but I have been wrong before.

If you read some of the manifesto’s around about the various alt-coins I truly believe that the intent is good and righteous. But we are still talking about the mark 1 human being and as such people will find a way to abuse and seek personal gain just out of pure greed.

And that’s the issue. That’s where the pump and dump ponzi aspect rears it’s ugly head.

This is a currency that lends it self to being abused easily because it’s entirely computer based and a complete mystery to most people. You’re not paying any of the original investors like a ponzi or pyramid, and yes your pie is getting bigger at the same rate as theirs if you’re mining but the potential for abuse and misuse is massive.

The stellar lack of understanding lends it self to criminal behavior; In many ways I liken it to the stock market, the rich who are in the know will invest wisely and make a lot of money, where as the people who don’t know will get bilked out of their hard earned cash simply because they don’t know what to do and what not to do. And unlike the stock market, there is a complete lack of government oversight and regulations and a lack of physical assets – not even paper in the case of some stock.

This is why I do believe it’s a ponzi on some levels, or rather it lends itself to being a ponzi because people can use it as a mechanism to lure the unwary and make personal gains from other peoples losses. It is not a ponzi in and of itself, but it can easily be used as one by even the youngest hipster script kiddie.

In many ways the whole thing reminds me of the early US when every state, province, town and bank had it’s own currency and they were struggling to figure it out. The difference being, unlike those early currencies there is absolutely no safety net. No real hard “thing” to back up the value of the various currencies.

It’s an interesting time. And I think so long as you mine without investing any really money in it, no loss.. My computer was on crunching numbers anyway for Seti or World Community Grid.. Really they are the ones losing out.

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