Bitcoin Forum

Why Bitcoin is not a pyramid scheme (or ponzi scheme) (http://bitcoinsquare.wordpress.com/2013/03/25/why-bitcoin-is-not-a-pyramid-scheme-or-ponzi-scheme/)

It's an interesting discussion since it's most people (also mine) initial reaction when learning about Bitcoin. Will this be a problem, what do you think?

The 'ponzi scheme' fallacy grinds my gears so much. For a couple of reasons:

1. It's intellectually lazy and ignorant. People are using the term 'ponzi scheme' to mean anything finance based that they disagree with. They want to appear to have an intelligent criticism but they are just parroting terms they heard elsewhere, making the reality the complete opposite.

2. A ponzi scheme involves an investment fund paying out earlier investors with the contributions from later investors; Bitcoin isn't a fund, and it doesn't pay anything out, so it's pretty silly to label it as a ponzi scheme when it doesn't even categorically have the ability to become one, even people wanted it to be. You may as well call a tree or a glass of water a ponzi scheme.

Agreed. Calling something a ponzi simply because people who are in early do better than people who aren't is just false. In many things, people who take the early dive endure more risk for the potential of a greater reward. Ask any venture capitalist or startup entrepreneur.

For what it's worth, my first introduction to bitcoin was when I read a slashdot post in spring 2011 about it hitting dollar parity. My reaction was "interesting", but not knowing what it was about, I just kinda assumed it was another centralized virtual currency like WoW gold, Linden dollars, or Facebook credits. Only after seeing another post a month later did I take the plunge and start to research what it's all about. Still haven't come up for air...

Bitcoin is acting like any other thing which is undervalued given it's potential.  The existence of the solution is only just becoming known to a more broad segment of the population, and those who have been aware of it are starting to understand it's potential.  Naturally it's going to rise.  Possibly by a very large amount.  Bitcoin is no more of a Ponzi scheme than stocks in this respect.  To me.

One thing that I find to be quite true is that a small percentage of people inevitably accumulate much of the wealth.  It's probably easier to do with Bitcoin and will happen much faster than with most other forms of wealth, and could impact it's exchange functionality (with limited liquidity, heavy speculative activity causing value swings, etc.)  An exchange currency designed such that the wealth was automatically re-distributed to users might end up having broad based appeal and thus ultimately end up being more popular.  Time will tell.

Well said.

Also, I just realized that bitcoin is now over your success case target of $60/btc. Congrats.

His arguments are interesting but they are not that strong. His assertion that the value of bitcoin does not grow as a result of transactions may only true in the strictest sense, but the value in dollars grows (or at least is expected to grow). Bitcoin's limit is not a strong argument because there is also a limit to growth in a pyramid scheme -- the number of people on the planet.

I think the strongest argument is that if bitcoin is considered a pyramid scheme, then commodity trading must also be considered a pyramid scheme.

A tree is a ponzi scheme.  Old branches sucker newer branches into giving them sugar. New branches can only get sugar if they sucker leaves to give it to them.  At the end of summer the whole enterpise collapses, all the leaves die, and all the sugar ends up in the big branches.

Neither ponzi or a pyramid. Might be bubble. Can't say until it collapses for final time... If it collapses...

A Ponzi or Pyramid Scheme is where someone sells fake assets or even imaginary assets and its is easy to make people think bitcoin is somehow like this but in reality its the amalgamation of the worlds most powerful computing network making digital currency that has intrinsic value almost beyond comprehension. This explanation is somewhat idealistic though of course everything has weaknesses and Bitcoin would be no exception.

The value may or may not grow due to transactions, that is not the point. In a pyramid scheme, a transaction wouldn't make sense without the product growing in size/prize when it goes down the line. Bitcoin may increase in value ($/BTC), however, that is no issue because when the price becomes to high, we will switch to mBTC as a standard, leaving the early adopters lucky.

The limit I was talking about, as you said, is fundamentally different from the one a pyramid scheme has. Within the pyramid scheme, the limit is the flaw. Because the end of every downline will never be able to get a return of investment as soon as the limit has been reached. In Bitcoin 1) There is no downline (so no sole-victims of a crash) 2) the limit isn't by definition the end of Bitcoin.

Reach a pyramid scheme's limit. -> It stops and late adopters have lost their money.
Reach the limit of Bitcoin. -> Mining is still needed, Bitcoins can still be used, the value probably increases (leaving even the late adopters happy).

Saying there is a limit to pyramid schemes, therefore it doesn't differ much from Bitcoin, is equivalent to saying there is a limit to intercourse, therefore doesn't differ from a pyramid scheme so don't do it. In Bitcoin, just as with intercourse, the end is the best part. In Pyramid schemes, it's the climax of criminal activity.

Not a bubble. "Bitcoin scheme".

What do you mean? At this point, there will always be a come-back when Bitcoin collapses. Maybe it will be litecoin, maybe it will be Bitcoin at 10 USD. But it will not stop.

Thx!  Yup, to me personally, and exclusively from my speculative mindset, I now have to classify Bitcoin as a 'success'.  I reclaimed half my initial outlay at this number and will do the other half at somewhat North of $100/BTC (if we get there.)  Although I pride myself on being stoic, it would be a lie to claim not to be excited and delighted.

The 'jackpot' scenario (insane $$$/BTC) remains on the table and while I still consider it highly unlikely it seems less unlikely than at any time in the past.  If we move in that direction I anticipate playing a fair percentage of my hoard into it though I will likely die with a certain number of value-controlling secret keys.  Alternate options may be to support projects I believe in if it can be done most effectively with Bitcoin.

I mean that Satoshi invented a new scheme. Just like before Ponzi (or whoever was the first) there were no ponzi schemes.

I do not see Ponzi in this scheme. Nobody promise anything to anybody. You use the scheme at your own risk, this is explicitly stated in bitcoin wiki. It is true that early miners made good profit in short time, but they could suck with equal probability if bitcoin failed, just as everybody else. 

No. It is not zero sum. It receives energy, carbon and minerals and produces ... a tree. Nothing is created in real Ponzi scheme, just redistribution of money takes place.

As opposed to social security.  A ponzi scheme run by the US government.