Why people think Bitcoin is a ponzi scheme?

[superfastkyle]

If your like me, you probably first heard about bitcoin because you could earn money with your computer.  Although I don't think bitcoin is a ponzi scheme, I think it does make some sense to see it that way. Just take the last few weeks for instant. In anticipation of the block reward halving prices have mostly stagnated but difficulty has skyrocketed. As if after block halving there will be no more money to be made, like the end of a ponzi. People seem to be mining every coin they can in anticipation of the end and although some are hoarding it seems many are selling to recoup quickly while they still can. Now I understand alot of that is because of anticipation of new hardware.

But if as many asic devices have sold as vendors and some others would like us to believe, I can only see that after a few months people will be dumping coins to make up for the huge increase in difficulty and struggling to make their investment back. Creating a very similar cycle to where we are now, a panic. Which I believe will continue until the cost of asic devices becomes much cheaper and people see it as a good investment again and not something that will only benefit early investors. Unless a discounted used market or major competition between vendors causes a huge price decrease shortly after release it seems to me that we are heading for another several bad months like the end of last year. I think increasing the power of bitcoin mining devices so quickly will cause a bubble in what a miner can earn as profit, I don't think the bitcoin market will be able to handle, short term, terrahashes getting into the hands of someone like Inaba. (does anyone seriously think he will not be the first one to have a bfl asic?)

[odolvlobo]

It is because they don't know what a Ponzi scheme is. What they mean to say is that Bitcoin is a pyramid scheme.

By their definition, any asset that doesn't produce income is a pyramid scheme. If Bitcoin is a pyramid scheme, then every currency and every commodity is a pyramid scheme.

[Stephen Gornick]

after a few months people will be dumping coins to make up for the huge increase in difficulty and struggling to make their investment back. Creating a very similar cycle to where we are now, a panic.

A panic?   Right now?

if [,,, then] it seems to me that we are heading for another several bad months like the end of last year.

Bad for the Bitcoin exchange rate or just a bad time to be trying to use FPGAs and GPUs to mine at a profit?

I don't think the bitcoin market will be able to handle, short term, terrahashes getting into the hands of someone like Inaba. (does anyone seriously think he will not be the first one to have a bfl asic?)

By the time ASICs ship the block reward subsidy will already have dropped to just 3,600 BTC mined per-day.  It doesn't matter if there is 24 Thash/s mining or 60 Thash/s mining away, or 600 Thash/s ... the same number of BTC are mined each day -- 3,600 BTC.

I think increasing the power of bitcoin mining devices so quickly will cause a bubble in what a miner can earn as profit,

You are saying the distribution of those coins will change?  Like are you saying that many of the bitcoins will be going to those few who will receive ASICs first?   If so, then you might be correct.  If just one manufacturer ships, and the shipments are batches of pre-orders, then for a number of weeks that is very likely going to be true.

Let's say the initial ASIC shipments include 75 Thash/s (which is probably too low).  Today, the combined total of all existing FPGA and GPU miners is 25 Thash/s.   So those FPGA and GPU miners who were used to splitting 7,200 BTC per-day, will then be splitting just 900 BTC per-day   (3,600 BTC after the block reward subsidy drop, and then 25 Thash/s is only a quarter of the entire hashing capacity, after considering the 75 Thash/s added from the initial ASIC shipments.)

So yes, if you were receiving $100 worth of bitcoins in October (at $11 BTC/USD), that same hashing capacity will bring in just $12.50 worth of bitcoins in January (assuming BTC/USD is still $11 and also assuming that 75 Thash/s of ASICs is online by then).   So if you are mining with GPUs, either hope that the exchange rate skyrockets into record territory or plan to retire those power sucking GPUs as soon as ASICs ship, if not earlier at block 210,000 (Nov 28th).

But this has very little negative impact on the bitcoin exchange rate (which is generally what is inferred when using the term "ponzi scheme"), and I got the sense from your post that you felt it might.

[cunicula]

Bitcoin is analogous to a ponzi scheme because it is cannot be sustained in the long-term.
People have an intuition that this is true (though they don't know why), so they sloppily label it a ponzi.

[phr33]

Bitcoin is analogous to a ponzi scheme because it is cannot be sustained in the long-term.
People have an intuition that this is true (though they don't know why), so they sloppily label it a ponzi.

Nothing is sustainable over a long enough period! It doesn't make everything a ponzi...

[cunicula]

Bitcoin is analogous to a ponzi scheme because it is cannot be sustained in the long-term.
People have an intuition that this is true (though they don't know why), so they sloppily label it a ponzi.

Nothing is sustainable over a long enough period! It doesn't make everything a ponzi...

I agree with you. As you point out, sustainability is not a 0 or 1 categorization. An obviously unsustainable system is analagous to a ponzi. Thus the close association between bitcoin and ponzi. I would not recommend bitcoin, it is not sufficiently sustainable.

[superfastkyle]

I don't think you understood me at all. I think it will be almost impossible for anyone to mine at a reasonable profit. The hardware is too much of a jump that after the people who "know someone" profit (didn't mean to single out Inaba was using him as an example) the difficulty will be too high for me and you to make our investment back in a reasonable time. Most people are not attracted to bitcoin because of making anonymous low fee transactions. When bitcoin falls again to almost break even mining rates, like November of last year, its bad news. Bad mining returns equals less people learning about bitcoin which is in the end bad for bitcoin. People then think the free money is over, therefore bitcoin is over. Just like they were saying when profitability rates were low last year

Bad for the Bitcoin exchange rate or just a bad time to be trying to use FPGAs and GPUs to mine at a profit?

By the time ASICs ship the block reward subsidy will already have dropped to just 3,600 BTC mined per-day.  It doesn't matter if there is 24 Thash/s mining or 60 Thash/s mining away, or 600 Thash/s ... the same number of BTC are mined each day -- 3,600 BTC.

[/quote}

[superfastkyle]

I think the average person is less interested in the exchange rate and don't think any of my post referred to that. More people are interested in the "free money" idea. Right now the general public is mostly blind to the inflation going on in this and many countries. When we see more hyperinflation, which won't surprise me, more people will care about the exchange rate.

But this has very little negative impact on the bitcoin exchange rate (which is generally what is inferred when using the term "ponzi scheme"), and I got the sense from your post that you felt it might.

[cunicula]

I think the average person is less interested in the exchange rate and don't think any of my post referred to that. More people are interested in the "free money" idea.

Right. That is why everyone defends mining even though it is obvious that mining is extremely expensive and unnecessary. People like "free money" so much, that they convince themselves that the distribution of "free money" via mining is essential in some way. It is like pirate's essential secrecy.

Mining is a very important reason why bitcoin looks so similar to a ponzi.

In many ponzis, participants are asked to do some kind of useless work to make rewards seem justified (see Zeek rewards or whatever it was).

[HDSolar]

Kind of a chicken and an egg thing here, without mining you don't have bitcoin but without bitcoin you can't have mining.  Ponzi is a bit harsh if you ask me and so trying to compare this to that is not a very easy thing to do.

[cunicula]

Kind of a chicken and an egg thing here, without mining you don't have bitcoin but without bitcoin you can't have mining.  Ponzi is a bit harsh if you ask me and so trying to compare this to that is not a very easy thing to do.

Thanks. Case in point. ↑

Right. That is why everyone defends mining even though it is obvious that mining is extremely expensive and unnecessary. People like "free money" so much, that they convince themselves that the distribution of "free money" via mining is essential in some way. It is like pirate's essential secrecy.

Mining is a very important reason why bitcoin looks so similar to a ponzi.

In many ponzis, participants are asked to do some kind of useless work to make rewards seem justified (see Zeek rewards or whatever it was).

[Stephen Gornick]

Bad mining returns equals less people learning about bitcoin which is in the end bad for bitcoin. People then think the free money is over, therefore bitcoin is over.

Last month Bitcoin miners received a little over 200K BTC, or about 2% of all bitcoins that have been issued.   Next month Bitcoin miners will receive just 100K BTC, or less than 1% of all bitcoins that have been issued.  

This alone will cause many miners to power down their GPU hardware and quit mining.    This should not be a surprise to anyone.  

Here's from March of this year:

Bring Out Your Dead (GPUs)
 - http://bitcoinminer.com/post/20028732430



But Bitcoin doesn't exist for the benefit of miners.  Bitcoin exists because there was the need for a type of money that will not be devalued by political influences and a type of money that has no prejudice as far as how it is used.

It doesn't matter a hill of beans to Bitcoin gaining traction if those who are mining are making any money from it.   It only matters that there be sufficient mining capacity to ensure the blockchain is protected, and it is currently (and will continue to be) protected at a level that is way more than currently necessary.

the average person is less interested in the exchange rate and don't think any of my post referred to that.

When you stated "we are heading for another several bad months like the end of last year", I assumed you were referring to the exchange rate.  If you weren't referring to the exchange rate then I'm confused as that has a huge role in determining a miner's profit.

[cunicula]

But Bitcoin doesn't exist for the benefit of miners.

What are the miners for? It is a marketing scheme. An extremely clever one, I admit. However, mining has become weaker and weaker as a marketing tool over time. June 2011 bubble. That is the power of marketing.
We can't expect mining to help deliver anything like that again. Mining is becoming a pure liability.

[superfastkyle]

I also believe bitcoin mining should be used as a marketing tool to get people interested, it should be easy to use, like bitminters client with easily available hardware, not asic devices which will probably be backordered until they are no longer profitable. Then when people have them we need great services to spend them with, but people are unlikely to buy bitcoins when they can use cash or credit card instead. At least until vendors provide discount for bitcoin or only sell via bitcoin. Amazon could start accepting bitcoin tomorrow, and little increase of demand for bitcoin would occur, other than purely speculation based.

What I'm trying to do with this thread is warn people that this thought "ASIC is going to make me filthy rich in just months" does not make our endeavors look more legitimate to the general public, in fact it does just the opposite. Its obvious to me that bitcoin is attracted many more fraudsters and thieves based on this idea of getting rich, than would exist in other circles.

Last month Bitcoin miners received a little over 200K BTC, or about 2% of all bitcoins that have been issued.   Next month Bitcoin miners will receive just 100K BTC, or less than 1% of all bitcoins that have been issued.  

This alone will cause many miners to power down their GPU hardware and quit mining.    This should not be a surprise to anyone.

yes but those people who power down are more likely to be small time miners, who once they stop won't look back at bitcoin any time soon.

But Bitcoin doesn't exist for the benefit of miners.  Bitcoin exists because there was the need for a type of money that will not be devalued by political influences and a type of money that has no prejudice as far as how it is used.

It doesn't matter a hill of beans to Bitcoin gaining traction if those who are mining are making any money from it.   It only matters that there be sufficient mining capacity to ensure the blockchain is protected, and it is currently (and will continue to be) protected at a level that is way more than currently necessary.

I understand what your saying here, that mining doesn't matter. But realistically I think it is a very idealistic answer. Its like saying the fed only exists to keep the economy more stable and prevent bubbles/recessions. People do not have a good reason right now to use bitcoin. Most people don't have a problem with paypal/credit cards. Most people do not notice inflation of their fiat currencies. Most do not need to send money half way around the world, and if they do will probably do it at walmart.

the average person is less interested in the exchange rate and don't think any of my post referred to that.

When you stated "we are heading for another several bad months like the end of last year", I assumed you were referring to the exchange rate.  If you weren't referring to the exchange rate then I'm confused as that has a huge role in determining a miner's profit.

I should have clarified I was speaking about price/difficulty not the price directly

[cunicula]

I understand what your saying here, that mining doesn't matter.

Mining does matter. Mining proceeds are paid for by anyone who uses bitcoin as a payment medium or store of value. Right now you pay people to mine just by holding currency. People do not understand that they are paying miners by agreeing to hold currency. Just like people don't understand that they are giving the government revenue by holding dollars. It is a hidden tax. Mining just seems like free money. The future 'necessity' of mining justifies the distribution of free money today.

You also pay people to mine when you send currency. And the plan is to make you pay more and more over time. This is a salient tax on the user base. The myth is that this tax is necessary. People are happy to accept this myth. Right now, mining means 'free money' and the tax is some vague thing people will pay in the future.

In the future, mining will just mean straight tax. That sort of myth is quite hard to swallow. People will vote with their feet. Opting for almost free transactions instead of txns with salient fees.

This makes bitcoin very much like a ponzi. It closer to multi-level marketing, but ponzi is a more familiar term.

The frustrating thing is that it is hard as hell to break the myth right now. A lot of monetary myths are like this. Thus the famous saying about monetary crises: "The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought"

[bcpokey]

I also believe bitcoin mining should be used as a marketing tool to get people interested, it should be easy to use, like bitminters client with easily available hardware, not asic devices which will probably be backordered until they are no longer profitable. Then when people have them we need great services to spend them with, but people are unlikely to buy bitcoins when they can use cash or credit card instead. At least until vendors provide discount for bitcoin or only sell via bitcoin. Amazon could start accepting bitcoin tomorrow, and little increase of demand for bitcoin would occur, other than purely speculation based.

What I'm trying to do with this thread is warn people that this thought "ASIC is going to make me filthy rich in just months" does not make our endeavors look more legitimate to the general public, in fact it does just the opposite. Its obvious to me that bitcoin is attracted many more fraudsters and thieves based on this idea of getting rich, than would exist in other circles.

To what end? People should not in their own self-interest see the coming technology as a way to profit? Should they avoid ASIC altogether? It is something that has been a long time coming, and there really is no way of stopping it (whether it is now, or if it's a scam, in the future). Ideally there would be tons of kick-ass services, and easy to use mining for everyone, but the system has to grow organically, and as always happens that means inefficiently at best, and crazily at worst. I'm glad that there are people working towards the best interest of bitcoin as a whole, by providing services for BTC, and programs to help make the network more accessible, but I certainly don't expect everyone to stop themselves from any venture if it could be at all potentially harmful to BTC.

Last month Bitcoin miners received a little over 200K BTC, or about 2% of all bitcoins that have been issued.   Next month Bitcoin miners will receive just 100K BTC, or less than 1% of all bitcoins that have been issued.  

This alone will cause many miners to power down their GPU hardware and quit mining.    This should not be a surprise to anyone.

yes but those people who power down are more likely to be small time miners, who once they stop won't look back at bitcoin any time soon.

But Bitcoin doesn't exist for the benefit of miners.  Bitcoin exists because there was the need for a type of money that will not be devalued by political influences and a type of money that has no prejudice as far as how it is used.

It doesn't matter a hill of beans to Bitcoin gaining traction if those who are mining are making any money from it.   It only matters that there be sufficient mining capacity to ensure the blockchain is protected, and it is currently (and will continue to be) protected at a level that is way more than currently necessary.

I understand what your saying here, that mining doesn't matter. But realistically I think it is a very idealistic answer. Its like saying the fed only exists to keep the economy more stable and prevent bubbles/recessions. People do not have a good reason right now to use bitcoin. Most people don't have a problem with paypal/credit cards. Most people do not notice inflation of their fiat currencies. Most do not need to send money half way around the world, and if they do will probably do it at walmart.

To be fair, I do have a problem with paypal, and also need to send money halfway around the world, and there are no good options for me, sadly bitcoin is not really a good solution for me here either. If it were to grow however I would certainly be quite happy to use it in this manner, and it would be a great legitimate service. I see many others, who would be interested as such.
Mining does matter, but it is separate from the use of bitcoin, and the two need not be considered together.

As regards Ponzi schemes, people will be people and will always mislabel things, because they don't bother to learn the proper terminology, so it goes. Doesn't help that Ponzi schemes have been on peoples minds lately in larger news, what with Madoff and whatnot.

I understand what your saying here, that mining doesn't matter.

Mining does matter. Mining proceeds are paid for by anyone who uses bitcoin as a payment medium or store of value. Right now you pay people to mine just by holding currency. People do not understand that they are paying miners just by agreeing to hold currency. It is a hidden tax and bitcoin can get away with this just like the FED can. It seems like free money.

You also pay people to mine when you send currency. And the plan is to make you pay more and more over time. This is a salient tax on the user base. The myth is that this tax is necessary. People are happy to accept this myth. Right now, mining means 'free money' and the tax is some vague thing people will pay in the future.

In the future, mining will just mean straight tax. The myth will not be sustainable. And people will vote with their feet. Opting instead for truly (almost) free transactions instead of txns with salient fees.

This one I'm not sure I follow. How are mining proceeds paid for by anyone simply holding currency? Do you mean that people who support the current valuation of BTC are paying miners? Or is it something separate? As it stands, mining is not hidden anything, they generate X coins per day which are then either held or dumped into the system, very transparently.

[cunicula]

This one I'm not sure I follow. How are mining proceeds paid for by anyone simply holding currency? Do you mean that people who support the current valuation of BTC are paying miners? Or is it something separate? As it stands, mining is not hidden anything, they generate X coins per day which are then either held or dumped into the system, very transparently.

Okay, an analogy may help. Who pays for the money the FED lends to banks? The discount rate is completely transparent. What do people holding USD have to do with this?

[I'm reluctant to go into to more detail here because the issue should be obvious. The details are distracting.]

[bcpokey]

This one I'm not sure I follow. How are mining proceeds paid for by anyone simply holding currency? Do you mean that people who support the current valuation of BTC are paying miners? Or is it something separate? As it stands, mining is not hidden anything, they generate X coins per day which are then either held or dumped into the system, very transparently.

Okay, an analogy may help. Who pays for the money the FED lends to banks? The discount rate is completely transparent. What do people holding USD have to do with this?

[I'm reluctant to go into to more detail here because the issue should be obvious. The details are distracting.]

I see what you mean, though this is a bit of a loose analogy. Payment by devaluation, again a bit of loose usage with the term payment. Well that is fair, though I don't know that people are unaware of this fact, or at least not as unaware as you say. If it is known that X coins are generated every day, at a specific rate, it is fairly clear that this needs be made up for in some way.

[cunicula]

I see what you mean, though this is a bit of a loose analogy. Payment by devaluation, again a bit of loose usage with the term payment.

Sure, there will be about 2.5 million BTC paid to miners this year. That is a lot. Say we wanted raise that with fees. At current rates there are about 7300 BTC raised per year. Thus the fees would need to be raised by 340-fold. Such fees would be salient. You would see them leave your wallet everytime you make a txn. Rather than...

it is fairly clear that this needs be made up for in some way.

It would be

those bastards with their fees, fucking BitPal Mining Corporation.

This difference is what I mean by salient vs. hidden. Opting for hidden fees, 'free money', and 'no fees' is a clever marketing scheme. But it is an illusion.

[Stephen Gornick]

I also believe bitcoin mining should be used as a marketing tool to get people interested,

I think that distributing bitcoins that a Skittles the unicorn farts out would be more effective marketing than the existing method where a dollar's worth of bitcoin is spent on "marketing" yet the recipient, the miner, only gets a few cents of that (after subtracting costs for electricity and capital costs).

Bitcoin needed a system to subsidize the mining function until the currency has enough traction where it can be self-sustaining with transaction fees.  Now once the bitcoin subsidy drops in half, there will still be enough mining capacity remaining to provide the needed service (preventing double spending).  And in four years when it drops again, the number of transactions fess will be higher so there will be even less need then for the higher subsidy.  And four years after that, even more transaction fees and thus less subsidy is needed.  And on and on.

There's currently way more capacity than is needed, but there is not yet enough from the transaction fees to meet the needed level.  So the subsidy is doing its jobs, and it dropping in half next week won't hurt the security of bitcoin.