Bitcoin Forum

So the latest /. posting had a heated debate that went back and forth more interestingly then normal.  At the end there was this argument that I thought worth posing here. (There where a LOT of people calling bitcoin a ponzi scheme)

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fireteller2

Since I can't seem to engage anyone on the issue of _why_ bitcoin is a ponzi scheme other then "early adopters get a huge advantage over later adopters" which does not uniquely define ponzi schemes, I will try to argue it myself. Please help me find my errors. I’m am not being facetious, this is a real argument that I’ve outlined for myself. I did not cut out any counter argument that I could think of.

First. What is a ponzi scheme?

[Wikipedia]
"A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors, not from any actual profit earned by the organization, but from their own money or money paid by subsequent investors."

As I understand it this means:

Person A buys $10 of a Ponzi scheme X,
Person B then buys $10 of X.
X has $20. (and is only worth $20, because it doesn’t do anything)
X pays it’s owners $1.
X pays Person A $1 (dividend interest).
X pays Person B $1.
X has $17.

This can go on for a while if no one withdraws their capital, but at some point someone is going to have to buy $10 worth of X to pay A or B. If it doesn’t happen it collapses. Ok, I think that’s clear, and correct.

Now let me see if I can understand how this differs from say Apple stock.

Person A buys $10 of Apple stock
Person B buys $10 of Apple stock
Apple has $20.
Apple pays it’s expenses
Apple earns profits from doing things.
Apple’s worth is it’s profits minus it’s liabilities.
Apple is profitable, so apple has $21

However, Apple does not pay dividends. How does Person A or Person B make money from investing in Apple? At some point someone is going to have to buy $10 worth of Apple to pay A or B. That is A and B need a third party to realize the value of their investment. Ok, this is confusingly similar, let’s me see if I can understand the differences.

1) X pays dividends, Apple does not.
2) When you buy shares of X you buy them from X, when you buy shares of Apple you buy them from A or B, i.e. other share holders.
3) So this means that there is no set number of shares of X, X wants to keep selling as much as it can. There is a fixed number of shares of Apple.
4) Apple makes a profit, and therefore has a ‘demonstrable’ value. X can only operate at a loss, it’s value is it’s total deposits minus payments.

Ok I think I understand some differences, but what if Apple was operating at a loss? How is that not like X? I guess because each share of Apple is a fixed percentage of the total value of Apple, whereas you don’t have any real percentage of X. So if Apple operated at a loss your share value would go down. That means that another key feature of Apple is that it is transparent, you know it’s value, you know how many shares there are and you know how many shares you have. With X you don’t know it’s value, the number of shares there are or the number of shares you have.

I think I understand these differences. Do I have something wrong?

So which of these two systems is bitcoin most like?

1) Bitcoins do not pay dividends.
2) You buy them from other holders, there is no X to buy them from.
3) There is a set number of them.
4) It is transparent, you know how many shares there are and you know how many shares you have.

This all looks like Apple stock to me. That seems to leave the issue of value.

X is only the value of all deposits minus payments.

This does sound a bit like bitcoin without the payments part. Isn’t bitcoin just the value of all the money that’s been put into it? No wait, there is no X in which all the money spent on bitcoin is being held. Hmm this is a tough one, does that mean that bitcoin is actually worse then a Ponzi scheme? let me try it with apple.

Apple’s value is what it does.

This sounds like bitcoin too. Bitcoin is software that has some unique features. So then is bitcoin more like Apple? A little, but it doesn’t generate revenue. Nevertheless it does seem to have value as a software tool, and that’s not consistent with X.

I’m not sure I’m sold one way or the other on the ‘value’ issue, but in every other regard Bitcoin looks more like a commodity such as Apple stock, then it does like a Ponzi scheme. The point that a Ponzi scheme continues to create “shares” to get new investors seems like a key factor in what is wrong with a Ponzi scheme. Neither Apple stock nor Bitcoins do this.

My conclusion is, Bitcoins are not a Ponzi scheme.

Help me out here, what are your thoughts? Did I get it wrong?

Bitcoin is not a Ponzi Scheme.

To constitute a Ponzi scheme, two premises must be fulfilled
1. the beginner and followers create no value at all;
2. what participants earned is solely depend on what followers invested.

The creator of Bitcoin could earned nothing from following participants...and even if he earned something, what he earned is not solely depend on what followers invested.

https://en.bitcoin.it/wiki/FAQ#Is_Bitcoin_a_Ponzi_scheme.3F

Ponzi:

A invest money
B invest money
A get's his own and part of B's money back
A invest back
B get his own and part of A's newly invested money
and so on and so on...

Bitcoin isn't Ponzi as the value comes from increase of value of investment. Like any real good, gold, art and collectable. Also this good is "minable" so there is option to produce your own.

Just like gold isn't ponzi...

There will be losers in the big game of bitcoin speculation.
And those losers will eventually sue the winners.

Thus, the debate about bitcoin being a Ponzi scheme or not is probably only going to be settled once we've had at least someone file an according lawsuit.

I mean to say, IMHO it is absolutely irrelevant whether or not bitcoin actually is a Ponzi scheme. What finally matters will be the decision of a few grumpy old men in judges' gowns.

A lawsuit against *who*?

Precisely. How can it be a ponzi scheme without a central authority that benefits. Are you claiming early adopter are behind it? In that case, what a brilliant scheme. The ponzi, without the ponzi.

well, things do get improved with time.

ponzi is not practical these days since you get sued and lose everything.

so somebody had to invent a new modification, one without (being) a central authority that can be sued.

If you think that is enough then Bitcoin is a Ponzi scheme.
1. The persons holding bitcoins may very well create something of value, but just because they have some bitcoins and you do does not entitle you to any of the value they create. They can just as well realise that value through other currencies. Bitcoins do not *create* value, at best they help you preserve value that has already been created.
2. Almost all increase in the value of bitcoins comes from the fact that more and more people are putting money in bitcoins, and only a small fraction of the coins in circulation are being sold. A lot of money has been taken out of the system and will not go back in, so if for some theoretical reason everybody suddently wanted to sell they would on average get much less than they spent.

What I've come to realize is that Bitcoin is a ponzi scheme. But so what?

The US Dollar is also a ponzi scheme, by the definition of a ponzi scheme.

A ponzi scheme is just anything in which the first people to get in benefit greatly at the expense of those who are late to get in.

The difference? In Bitcoin people who are smart and took to the concept early are rewarded, in US Dollars, banks and governments are rewarded, and we the people are SCREWED time and time again.

I for one would much rather be a part of a ponzi scheme that is actually controlled by the people as a whole, instead of some elite power structure. And I think the average people feel that way as well. Every person I know hates banks, they're simply sick of getting raped by them. They just don't know what they can do about it. Yet.

Let me guess.

These people at "slash dot" i must be a noob for not knowing or caring what slash dot is, I'm assuming it's just another site like reddit for random people to voice their opinions on topics..

I'm assuming they have nothing to do with bitcoin and are looking at it from the outside.

Therefore in my eyes, their opinion just doesn't matter.  As American's most of us think we're doing good by occupying all of these countries overseas.  Do we give a fuck what some jihadist thinks about our invasion?  absolutely not.. his opinion doesn't matter at all.

Any winner. If you're the loser in a Ponzi scheme, you will sue whoever made a profit out of it. Because his profit was your damage.

Except that because Apple make a profit without paying a dividend, their total assets increase and your shares represent the same proportion of a bigger pie, so they're worth more. In practice shares are generally valued at a premium to assets, representing the expectation that the company is expected to make future profits. You could slice up the company and divide up the value of the assets between the shareholders, and this does sometimes happen when one isn't using its assets efficiently, but generally it's worth more as a going concern.

For example, there was an interesting period where Acorn Group plc, who created the ubiquitous ARM processors that are now used pretty much everywhere and spun this off as a joint subsidary with Apple, had shares in ARM worth more than their entire market capitalization. Acorn Group was bought and split up as a direct result of this.

Bitcoins are different in that they're just numbers in a database; there's no underlying assets and certainly no-one doing useful business using said assets. Or to quote another /.er:


Also, an important distinction between the two is that Apple's value is not simply "what it does", it's that they can take their assets and use them in a way that makes money. Bitcoin's value, on the other hand, lies solely in the fact that you can find someone else willing to pay you for the bitcoins either in fiat money or in goods. The two are not quite the same.

First, Apple has not paid a dividend because they have always reinvested their income. They could pay a dividend at any time.

But:

A Ponzi scheme necessarily involves fraud. If the investors know that they are only getting money from future investors, it's not a Ponzi scheme.

A Ponzi scheme creates no value for investors unless new investors are brought in. Even if no new money were ever brought into the bitcoin economy, bitcoins would still create value for people who used them because they would enable transactions that would otherwise be impossible, more expensive, or more difficult. Even if every dollar going into bitcoins were balanced by a dollar going out and the value of a bitcoin never significantly changed, bitcoins would still produce added value for everyone who used them.

With a Ponzi scheme, everyone who makes money is offset by someone who loses at least that much money, usually more. Every dollar made is someone else's loss. In principle, nobody need ever lose money on bitcoins. Again, suppose the price of bitcoins remains forever stable at $14. Exchanges will still make money enabling transfers between national currencies and bitcoins, merchants will still gain value accepting bitcoins where those payments are easier, and consumers will still gain value using bitcoins to make purchasing easier.

The defining feature of a Ponzi scheme is having a "Mr Ponzi" equivalent who runs it all, and benefits by lying to the investors.  There is no real investment, and the investors don't know that.

Bitcoin is not a lie.  It's not necessarily going to make money, but investors enter with their eyes open.

BitCoin is a Ponzi scheme in the same way that Real Estate is a Ponzi scheme.

Ponzi schemes in a nutshell:

1. Charles Ponzi says, "Invest with me and I'll pay you 150% whenever you cash out!"

2. Trusting individuals give Ponzi their money.

3. Whenever someone wishes to cash out, Ponzi pays them from what he's accumulated from other investors or, if he's already spent it, he gets more people to give him money and uses that. There is no other source to draw from.

4. Someone finally asks too many questions or a significant number of investors attempt to cash out and the whole house of cards comes crashing down when it becomes public knowledge that Peter was being robbed to pay Paul.



Differences with Bitcoin:

1. There is a finite number of BTC in existence. Their value increases because the demand for them increases.

2. The only advantage "early adopters" may have is that they were able to acquire bitcoins at a time when it was relatively inexpensive to mine them. There was no "Charles Ponzi" to receive an investment! Bitcoins are still created the same way but just at a higher difficulty rate and with much more competition.

3. The project is open source and, consequently, there is no deception inherent in it. The code does not lie.

4. Bitcoin is a currency, not an investment. You may choose to invest in this currency with the hopes that it will increase in value but it is not required for it to function in its intended role.

Finally, someone that can explain it in a way for every dumbass to understand that Bitcoin isn't and will never be a Ponzi scheme.

+1 for you, my friend :)

Thanks for that. That's the best one sentence explanation for why bitcoin is not a Ponzi scheme.

Blabla.

1. Invest in me, I am BTC I only gain in value. However, nobody actually creates a justifyable increase in value outside of speculation/being told so(150% gainz!!111). It is thus "empty". There is no reason a BTC should be worth something other than people who "believe the story".

2. Get told: Oh sure, cash out anytime you want with the profits made! It's a currency!

3. If all BTC holders were to attempt to cash out RIGHT NOW, there would be a huge percentage that would not be able to find any takers.

4. Different to ponzi in 0 ways.

5. ???

6. Profit!

How does that differ from all the world's gold holders panicking and trying to liquidate millions of ounces of gold within a few hours?

How is any commodity or currency or investment 'safeguarded' against market volatility? I'd love to hear your explanation.

Commodities can *only* be liquidated if there are people buying the commodity (be it gold, silver, palladium, platinum, oil, coffee beans, tulips or bitcoins).
Obviously if there are 10 million people selling something and only 1000 people buying, the price will drop because holders want to get rid of their possessions for any price available.

1. Gold or oil or any other commodity can then be said to have value based on investors 'believing the story.'  There is some truth here but it can be applied to ANY investment (real estate, stocks etc.)

3. if 30% of the world's gold reserves were to be sold RIGHT NOW - what would happen to the price of gold?  It would certainly drop a lot (currently at $1588/oz) possibly by upwards of 50% or more as margin/leverage calls would likely come into play driving the price down further.  However, at the end of this process gold would still have some value, some proportion of 'gold bugs' 'believing the story' whether that value was $800/oz or even $150/oz.


IMO Bitcoin acts as an asset AND a currency, and is so quite different from a Ponzi scheme.

But this is no different than infusing a token product in a pyramid scheme to pull them over the line of being seen as solely money shifting. Multi-level-marketing is all about selling a "product", but in reality, the sales of that product are never what drives the operation, but rather the recruitment of new members and their "initiation fee".

Saying that Bitcoin has this intrinsic usefulness as a payment mechanism (or currency) doesn't matter, if the injection of value into Bitcoin is really to get a payout as its value rises. The fact that (1) Bitcoin is *not* being used as a currency (except for alpaca socks, drugs and cofee), and that (2) there is no real attempt by the developers to streamline its safety or increase simplicity in order for it to actually be adopted as one, tells me that Bitcoin currency potential is not what makes Bitcoin attractive to current investors (despite their claims to the contrary) and, moreover, was never really was intended to be. Frankly, I think the whole "cryptocurrency" angle is the most brilliantly designed patter upon which a ponzi scheme was ever be built. Forget jewelry, or super-vitamins, here you are part of an ideological revolution!

Simply put, if Bitcoin really was a useful and viable payment system, the Bitcoin economy wouldn't almost entirely consist of speculation on exchanges. The reason all people are running around, putting up posters to expose people to Bitcoin is so that more "initation fees" can be collected.

So, what you're basically saying is that bitcoins, USD, gold, silver, wheat, salt, rice, beef, pork, etc, are all Ponzi schemes.

https://i.imgur.com/7Gxir.jpg

After all i was wrong! Not every dumbass will understand...  ::)

I'm curious to know how the first steps in the acceptance of bitcoin differ from the first steps of acceptance of a 'legitimate' online currency.

1) Introduce currency.  It has no value because no one uses it.
2) People start speculating in it based on anticipated use.
3) People start using it because it has the value speculators have introduced to it.
4) It increases in use and stability.

You seem to be arguing that because our car is only one mile down the road it'll never get a hundred miles further.  I'm thinking the same way it got the first mile, am I crazy?

This.


Bitcoin is comody now, which might be in future used as currency. Its like collectable goods, minimal real value, but high expectations and thus high price not a Ponzi.

It might very well be a bubble, but not a Ponzi. Ponzi should be used with centralised schemes where early investors are paid by later. Pyramid is bit more complex. As nothing is paid out, it can't be Ponzi.

Slashdot is one of the original "Reddit" type sites.  It started in the late 1990's.  I joined in 1998, so it was around then, at least.  You could say Reddit and Digg are "Slashdot-type" sites.

But like any tech-heavy discussion site (say, like forums.bitcoin.org) you have a lot of smart people who think they know everything.  And Slashdot's users are consistently wrong about what they think will catch on with the "general population".  For example, they all thought the Apple iPad would be a huge failure.

So, looking at it that way, if the Slashdot users think Bitcoin will fail, it's now guaranteed to succeed!

It depends on what the product is. If the product is useless or drastically overpriced and must always realistically be so, I agree. If the product is innovative and genuinely useful, then I disagree.

If you believe bitcoins can never become a useful and viable payment system, then it's really no different from investments in ill-conceived products of other kinds. The IPOs of the dot-com boom created huge values for companies attempting to make products that had no chance in the market. You can certainly argue that this is what bitcoin is, but that's not the same thing as a scam or Ponzi scheme. That's just a bad idea.

This is a fair point. How long do you give Bitcoin till it becomes utilized for its intended use? Or, put another way, what do you think would be the signs (if ever) that Bitcoin will not achieve this goal?

I think it could go on forever being used solely for those niche applications where it genuinely works best. I think that would cause its value to erode, which would be completely appropriate. Whether you consider that a failure or a limited success depends purely on your expectations.

In my heart of hearts, I believe bitcoins are doomed to fail. However, it's not because they're not a viable cryptocurrency, it's because they're the first serious attempt. We're bound to figure out how to do things better the next time around, and likely a superior replacement will doom bitcoins. However, no serious flaws have emerged yet, so the first mover advantage could carry. Oddly, that's kind of why I'm motivated to make them work. Even if bitcoins fail, we need to learn as much as possible so the next replacement will be as good as possible.

Does anyone know what the serious flaws that supposedly doom bitcoins are? Other than the fact that government actions could doom it, or a superior cryptocurrency (or one endorsed by large entities) could supplant it?

I've come to understand the nature of 'ponzi' to be a function of focus, how close in (or far out) one zooms.

In light of this, it is far more practical to ask simple questions of Bitcoin utility, rather than (what are essentially) economic-philosophy questions.

So we go from: "Is Bitcoin a ponzi?"
to: "What is the definition of a ponzi?"
to: Screw it. What can I buy with a Bitcoin?

My guess would be 'distribution friction'.
By this I mean that because it's a global system, it really needs a very large number of bitcoin holders in order to be really useful or dominant in more than a few niche markets.
With the 21million coin limit - there's something of a psychological barrier to interest in the idea unless you can be a holder of at least a few whole bitcoins.
The obvious way for that barrier to disappear - is for the per bitcoin value to be extremely high. But without the massive distribution whereby 10's of millions of people have some millicoins or microcoins, there's little incentive for that sort of spread. (chicken and egg stuff I guess)

Part of this distribution friction is also the costs associated with converting other currencies to and from BTC, as well as the non-availability of exchanges in most geographical markets.

I'm not saying the 21million limit is an issue in itself - but somehow the distribution seems too concentrated.
One way I see that could help this - is if it were really useful for microtransactions and made headway in some related market (currency of choice for MMORPG virtual goods?) . This would give an incentive for large numbers of people to desire sub-BTC quantities.
Unfortunately I understand there are (at least for now) a few technical impediments to it being a good system for a vast number of truly small transactions.

I don't know if 'doomed' is quite what this implies.. but it suggests to me that the required timeframe for serious distribution of bitcoin could be in decades or even on the order of a century or so.

Bitcoin may indeed be revolutionary - but it might be our grandchildren who reap the real rewards.

Like any other technology, it will find its first success in the niche markets that it serves best. Over time, if it's useful, it will expand into other markets that it may not serve quite as perfectly, but merely better than anything else.

Wireless telephones found their first market with the wealthy. Computers found their first market with large corporations and governments. Bitcoins are finding their first market in the underground and geek economy.

Obviously, getting out of the niche is a large hurdle and many technologies never make it. But distribution friction is going down.

Yes, there's a chicken and egg problem. But the solution to that is niche markets where it's especially useful.

But just how does it get out of those niches?
The general effect of businesses running in those niche markets is to slurp the wealth up from the end-users into the businesses.
The consumers in those niches will presumably have a need to go back to the exchanges and get some more BTC to continue participating, while the businesses will cash out their BTC to other currencies in order to pay their costs.

I just see a situation where those little markets could sail along with a fairly low BTC value.. and there's still nothing really driving overall distribution.

So a few more niche markets open up over time..  but unless the value skyrockets and true microtransactions are practical - it still doesn't mean it's destined to serve the wider ecommerce market properly any time soon. (ie within a decade or so)

I'm not particularly tied to this scenario.. It just seems plausible to me that it could go the ultra-slow way.

Is it a reasonable assumption that due to the limited distribution,  the per BTC value must be very high for it to expand to other markets?

Bitcoin turned out not to be great for microtransactions afterall.

But it is not the technology necessarily that causes this. At least not in the MMORPG field, where people can already be seen to operate at a financial loss, in fact fully expect to operate at a financial loss.

So my take has been that Bitcoins can take on the ghastly can of worms that is the interface to fiat currencies, freeing other blockchain-based currencies to do some of the things that the kind of fiat-currency-interfaces adopted by Bitcoin make difficult to do with Bitcoin.

The Galactic Milieu (https://sourceforge.net/p/galacticmilieu/home/Home/) has already spawned a number of spinoffs of Bitcoin, not just to allow transaction fees to remain small in proportion to the prices paid for things but also because some "nations" want to float their own "national currency" on the "galactic market" and some players want to be able to actually play the forex markets and stock markets of the Milieu.

I have also set up a game that can serve as a distribution system (http://galaxies.mygamesonline.org), distributing virtual assets even to players who do not pay to play.

Not using Bitcoins directly gives a further step of remove from fiat currencies and all the hassles they can entail (accusations of being "gambling" for example) as well as a way to avoid the relative-to-prices "high" transaction fees of actual Bitcoins. (If you mine millions of tons of resources a day, and pay less than a bitcoin a month to play, each ton is worth only a tiny fraction of a bitcoin, but individual characters might only need to buy a few kilograms to forge a sword from...)

-MarkM-

That makes sense..  As is clear from your example about mining game resources to create some little thing as a sword - the value of such things may easily be on the order of picoBTC or less.  Even if bitcoin microtransactions were good down to the satoshi level, there would be a need for other systems to break it down further and so only use BTC indirectly.


I've had a casual interest in these sorts of things for a while, and am familiar with freeciv and battle for wesnoth.
Galactic Milieu hadn't hit my radar..  and even now that it has - I don't understand it.
(downloaded the client - it displays a splash screen and exits. Not much clue there)

Nevertheless.. what little I can deduce from the links above tells me it might be interesting. I'll try again if it hits my radar in a few months/years!

As to whether this sort of thing can help the overall distribution/uptake of bitcoin - I'd guess so.. gradually, but I still don't see anything happening soon.

The only clients on there for downloading are GRouPcoin and a play by mail thing that looked like it might potentially be able to be made use of with some work but that never resulted in any actual emails arriving at the order-submission address.

If it simply throws up a splash screen and exits I guess that explains why no actual play by email orders ever got submitted.

It worked for me, I would not have uploaded it otherwise. But it seems to be pretty much a failed experiment.

The real concept is not to need its own special clients. People wanting to control events on a planetary scale use Freeciv as a client, equipping it with the Galactic Ruleset which is available on the Freeciv forums. People just wanting a playable storyboard history of some portion of the events of the past use Battle for Wesnoth, downloading the "campaigns" from the add-ons system already built into that "client". People liking a more interactive, and single-character viewpoint use a Crossfire RPG client to connect to the CrossCiv server. Etc.

-MarkM-

I didn't say it would be a failure, and I think some of the slash dotters would have had the same feeling as me.  It was a disappointment when it came out that it used iOS and not the Full Mac OS, but I knew millions would flock to it due to it's simplicity and the Apple Logo.  I forget how long I've been looking at slash dot, but its been atleast 10 years.  I posted every now and then, but forgot my pw, and some reason recovery doesn't work, think I used a socal.rr.com email that I nolonger have access to.

I just want to post because I can ask, "so, APPLE is a ponzi scheme?"  They might be one of the worst companies when it comes to treating their customers badly, maybe apple users are masochistic and rich - I don't care as the products look clunky and unfriendly.

More seriously, the issue of dividends in companies is a choice of distribution.  Investors can choose to hold the same relative percentage irrespective of dividends and the dividend rate is driven more by tax efficiency than anything else.  You don;t need dividend income from a share in a company to realize value.

I look to some of the features of currency and Bitcoin has an advantage in low cost international value transfer and that is what I will use it for.  I would also recommend people read the original Ponzi scheme notes for how it worked - a stroke of genius for the time, but pure fraud.  I do not need anyone to value my otherwise worthless bitcoins, similarly, I don't need anyone to value my USD either.

Alot of people are very adamant to call it a ponzi scheme or try to convince others it is not a ponzi scheme. But the fact may be it is a different "scheme" entirely.

I really do love the potential of bitcoin as a currency, but I just can't see how it could transition into that.

And while it remains a gambling game of speculators winning money from other speculators it is definitely a "scheme" of some original kind.

You may call it a scheme but i really doubt you can call it an original one ;)
See: The bolded part of your quote!

The Ponzi scheme could not be based on other Ponzi scheme platform. We have pyramids based on bitcoins, so, Bitcoin itself is not a pyramid  ;).
It's commodity.

What is a funny-money scheme?

-MarkM-

Are you sure? IANAL, but most schemes involve fraud (Madoff's for example, which btw went on for decades), what would make them illegal even without explicit ban.