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Author Topic: The Ponzi scheme argument  (Read 4890 times)
MrJoshua
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July 15, 2011, 09:20:51 AM
 #1

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?

The value of bitcoins is not a theory, predictions of it's failure are what is theoretical.
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nakowa
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July 15, 2011, 09:34:58 AM
 #2

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.


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July 15, 2011, 09:51:02 AM
 #3

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

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July 15, 2011, 09:58:16 AM
 #4

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...

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July 15, 2011, 09:59:33 AM
 #5

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.

Yeah, well... I'm gonna go build my own blockchain, with blackjack and hookers. In fact, forget the blockchain!
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July 15, 2011, 10:22:12 AM
 #6

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.
A lawsuit against *who*?

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DamienBlack
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July 15, 2011, 10:24:58 AM
 #7

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.
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.

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relmeas
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July 15, 2011, 11:17:33 AM
 #8

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.
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July 15, 2011, 11:50:17 AM
 #9

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.
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.
tanerlorn
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July 15, 2011, 01:08:33 PM
 #10

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.
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July 15, 2011, 01:13:02 PM
 #11

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.
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July 15, 2011, 01:23:05 PM
 #12

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.
A lawsuit against *who*?


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.

Yeah, well... I'm gonna go build my own blockchain, with blackjack and hookers. In fact, forget the blockchain!
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July 15, 2011, 01:54:30 PM
 #13

Quote
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.
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:

Quote
Bitcoin is like a stock market with a single stock, for a company with no assets, and paying no dividends. Would you rush to pour your money into that?

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.

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July 15, 2011, 02:14:17 PM
 #14

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.

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July 15, 2011, 02:35:49 PM
 #15

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.

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July 15, 2011, 02:39:30 PM
 #16

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

http://www.bitpools.com
Pool your bitcoins with others. Vote on solutions using the Bitcoin blockchain. Keep your bitcoins in your cold storage until you find a solution you like.
Links and Reviews of useful every day places to spend bitcoins: https://bitcointalk.org/index.php?topic=943143.0
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July 15, 2011, 02:43:52 PM
 #17

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.

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July 15, 2011, 02:52:58 PM
 #18

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 Smiley

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July 15, 2011, 03:22:00 PM
 #19

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

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July 15, 2011, 03:45:11 PM
 #20

Quote
Differences with Bitcoin:

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. Huh

6. Profit!

Ho-Hum.
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