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)

---------------------

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?