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Bitcoin is a technology. It is a blockchain-based transaction ledger. There is a limited number of claims to this ledger. These are called satoshis, or bitcoins (10^8 satoshi). We are here to deduce if Bitcoin is a Ponzi scheme, a Pyramid scheme, a Greater-Fool's-game or just a freely-traded something, subject to markets' whims, resulting in booms, busts, bubbles and crashes.
A) I start with assuming that "Ponzi scheme" option is already refuted beyond doubt.
B) As for "Pyramid scheme", after much deliberation I fail to see the logic, how Bitcoin would qualify. I wonder if we even read the same definitions for a Pyramid scheme:
- Wikipedia
- Investopedia.
The essential qualifications for a pyramid are not met.
C) What has been discussed upthread under the name Pyramid scheme, should more precisely be called Greater-Fool's-game. The essence in this would be that people buy in anticipation of a price rise, without regard of the intrinsic value. If the price is indeed rising, this may suck quite many people in, resulting in a spectacular collapse if the intrinsic value fails to meet the expectations.
It does not matter whether we are talking about Internet stocks with currently negative earnings, tulip bulbs, shares of the Blockchain pie, or something "completely useless" such as modern art. The fact is that people are (in most jurisdictions) free to invent, produce and sell things for whatever price they can gouge in a voluntary market. Also buying at inflated prices is not criminalized.
At most, Bitcoin could be classified in this category.
It has to be noted that this kind of speculative bubbles are almost completely harmless. If the product does not have intrinsic value, its production does not burden the real economy. Every time someone buys the bag at a higher price, another one receives the money. The only way to become bankrupt is to take excessive risk or leverage, which are always very stupid actions and people prone to them cannot be helped unless all banks and casinos are closed.
Unlike Ponzis and Pyramid schemes, which revert to zero when unfolding, speculative bubbles revert to their intrinsic value. There are many Internet stocks that are doing good in Nasdaq, tulip bulbs have a certain price, bitcoins will always have a price and art has its valuation. The real economy lives on quite unaffected of the speculative valuation.
D) It seems that the crux of the matter is, whether Bitcoin/bitcoins have intrinsic value as a currency/money or not. If not, it has been a recurring fad over several years and numerous bubbles, which have repeatedly risen higher and higher. In fact, the numbers we are seeing in the exchanges testify that every day until this week has been a bear trap.
It is hardly possible that Bitcoin would have survived the 2011 bubble if there was not a promise of significant utility. The word promise is important, because money is a high network-effect thing. If I have all the money in the world, it is most likely worth less than half of it. Money tends to be worth the most when it is distributed in a Pareto way.
If all money belongs to a few and others are uniformly poor, the rich cannot employ their money to buy goods and services because the poor are not capitalized to produce them. Similarly the poor cannot buy from the rich because they don't have the money. The (hypothetical and unachievable) situation that everyone has the same amount of money, quickly leads to Pareto distribution (or "worse" top-heaviness, unless the rule of law is present).
Let's think the valuation of Facebook from the user perspective. When Facebook had one user, it was worthless. I would say the value per user grew rather quickly when the earliest users came. Just out of my hat, let's say they valued it at $100 on average. As new users were added, the value for them was initially just above zero (the threshold of joining in is to receive positive value), but the old users' value was increased due to network effects. The more Facebook grew, the more value for everyone. From systems perspective, it should have been obvious that the supermajority of the target segment globally would become users.
The valuation of Facebook in the stock market is $112 billion, which is $95 per monthly active user. If the ownership of the system were possible for everyone in every stage of the adoption process, we would have an ownership distribution curve similar to Bitcoin's. (Now there is some 29-year old geek that owns 24% of all, talk about inequality
) In both cases, the value is roughly proportional to the number of users, but the issuance is fixed.
Facebook would not have become so valuable if it had not become widespread. Then the investors would have lost their stake. If Bitcoin fails, investors lose likewise. If someone sees the failure before the others and sells out, good for him. It is not a reason to be jailed. This is the basic free stock market operation, nothing new to see there.
And there is no way to deconcentrate it from the current 90+% of BTC is in a few hands. Thus it can't be a widely accepted currency, because it is not widely held and can't be widely held. By the time 1% of the global population has purchased, it will be priced on the order $30,000+ and then the other 99% won't be able to afford to get much BTC at all. You say that is okay, but it means you impoverish the rest of the world relative to early adopters so the velocity of money would collapse, because very rich people spend a much smaller % of their money than middle class people. The 99% will never go for that arrangement, they will stick with fiat and then the collapse of Bitcoin's bubble will ensue and the stampede to the exits with all trampled and value lost.
Bitcoin is currently distributed in an even theoretically near-optimal scale-invariant Pareto way. Bitcoins can be easily traded in many parts of the world. The free market ensures that they are most optimally distributed, because if someone finds himself with too many bitcoins, he can sell. The one lacking can buy. The distribution of bitcoins is way more efficient and widespread than Facebook stock, and will soon become possible for practically everyone on the planet, which is unprecedented for any investment vehicle or even currency!
We share the vision that the inordinate gains in price drive adoption quicker than the general understanding of Bitcoin spreads. This will lead to a bubble of extraordinary valuation. But that will pop even quicker than it formed and no value will have been lost. The recent examples to be carefully analyzed are the Nasdaq bubble of 1999-2000 and the PM in 1980. Bubbles act as boosters to the underlying. Nasdaq bubble fueled the all-pervasiveness of Internet in the 2000s by providing ample VC money to everyone interested. PM bubble encouraged mining, resulting in tumbling PM prices when the mines started operations a decade later.
The bubble happens when the 2nd % wants to buy. Then it crashes and the 98% can slowly start buying. My father still owns Internet stocks, he only bought them long after the bubble Wink Life and markets go on and do not magically stop at the bubble top. Bitcoin exchange rate will not go to zero, it will go down and provide a spectacular buying opportunity in the wake of mass adoption that will drive the price to its realistic long term value (if there is one).
I see it can never scale as a currency, thus it has no value to you once the gains stop. Thus you and everyone else will exit and the value will go to near 0. Because only a very small fraction of the market cap is using it for spending.
This can't change, because Bitcoin isn't designed to distribute out to the masses to get them involved in spending it.
Gold is also not used as a currency. Gold is the
most salable commodity, meaning that it is the easiest to part with in large quantities. This has been called Money in the past.
As bitcoin grows bigger, it may surpass gold in this regard, or may have already done so. Thought experiment is that a person finds himself in a random place with $1 million worth of gold or bitcoins. How long time and how many % loss he must spend to make the transactions necessary to convert the value to what he needs.
Silver used to be the most hoardable commodity, meaning that it is easiest to accumulate in small increments. Bitcoin has already become the most hoardable thing, proven by tipboxes etc. In long-range applications bitcoins are easier to accumulate than even cash!
There is a reason why the word 'silver' and 'money' are the same in 49 languages.Distributing the mining coin rewards to millions of people who download it with one-click will do that.
And the investors can buy from them. So no problem the greed will help then.
Bitcoin is the inverse (converse)!
The investors mine the coins, then the masses are expected to buy them. brain dead design for a coin.
The Russians tried to privatize the communist state wealth directly to the people. The result was 50 million people who owned their share of huge enterprises for a few minutes, until somebody bought it from them at a price of a small bottle of vodka, or a cup of coffee. The companies ended back in oligarch control. It is not optimal, workable or possible for everybody to own a little. It invariably ends in somebody owning it all, and the masses do not get much of a benefit for selling their share. As much as we both would like it, faucets don't work.
In a more theoretical vein, if we assume that the altcoin system is worth $1,000 per user, and the users generate the value for themselves by CPU mining, and the inflation rate mimics gold's 2% APR, then the mining reward is $20 per user per year, and it is indeed a perfect analogy to exchange your monthly reward for a cup of coffee. Hardly a recipe for a stealth mass-adoption.
