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Author Topic: Thought Experiment: Is Bitcoin a Ponzi scheme?  (Read 11483 times)
gusti
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March 09, 2011, 05:59:36 PM
 #41

But then what's the appeal of charging BTC for those services and goods if they could charge USD or EUR or other fiat currencies at a higher price? There isn't one.

Yes, there is.
When I charge all my goods and services with BTC, I have no limits on sending and receiving money worldwide, at no fees at all.
And I can be sure I will not be screwed by any financial institution or Paypal-like, with freezings and chargebacks shit.



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barbarousrelic
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March 09, 2011, 06:15:42 PM
 #42

http://en.wikipedia.org/wiki/Ponzi_scheme

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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.

http://www.sec.gov/answers/ponzi.htm
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A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.

Bitcoin does not pay returns, therefore, it cannot be a Ponzi scheme.

The value of Bitcoin may increase and it may later drop in value. Under this scenario, it can be rightly described as a bubble that popped, but it is not a Ponzi scheme.

Do not waste your time debating whether Bitcoin can work. It does work.

"Early adopters will profit" is not a sufficient condition to classify something as a pyramid or Ponzi scheme. If it was, Apple and Microsoft stock are Ponzi schemes.

There is no such thing as "market manipulation." There is only buying and selling.
hazek
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March 09, 2011, 06:17:30 PM
 #43

But if at any point along that path hoarders tighten too hard they'll drive goods and services out of this economy and put this process in reverse.

They're not hoarding, they're saving. If there is "too much" saving, prices will get too high, and some people will sell. If they are unable to sell due to high exchange rates, their asks will come down. I guess I just don't see any problem here that won't be solved by market forces. I plan on hoarding some BTC, but I am also investing some into BTC companies and acquiring some more to sell to friends and spend on the BTC economy.

As a "hoarder", it's in my best interest for the economy to become as big as possible, not just for me to hold as much BTC as possible.

I had to actually read back and see what exactly my initial point of this argument was because I agree with your statement in bold. But my initial argument was that we are already at that stage where the exchange rate is too high and that it will have to come down first before the economy can grow at a faster potentially exponential rate and and that the sooner the hoarders realize this the sooner the influx of new goods and services will happen..

My point is that the current exchange rate is not realistic and already too high and all my posts was basically theory supporting why that might be true.

My personality type: INTJ - please forgive my weaknesses (Not naturally in tune with others feelings; may be insensitive at times, tend to respond to conflict with logic and reason, tend to believe I'm always right)

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Cryptoman
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March 09, 2011, 06:25:18 PM
 #44

People absolutely don't just buy USD with their JPY if there's a cheaper option.

I think you are stuck on the intrinsic value of money and are neglecting its suitability for exchange.

Example 1: You want to buy oil and you need dollars to do so but you only have yen.  Solution: buy some dollars at the current exchange rate and then buy the oil.  

Example 2: You want to have pseudo-anonymity and a low transaction cost for a series of exchanges.  Solution: buy some BTC at the current exchange rate and then engage in your transactions.

In each example, another currency was better suited to the task at hand than the one you currently possessed, so you did an exchange first.  

Most merchants who price goods and services in BTC adjust their prices regularly to reflect the current exchange rate.  I sell wireless phone minutes for BTC, but my cost basis is in dollars.  So the BTC price of these minutes varies over the course of time.  If you want to refill your wireless phone anonymously, you can buy BTC at the current rate and then buy minutes from me with BTC.  Since my prices are tied to the BTC/USD exchange rate, you won't pay any more or less than if you bought the minutes directly in USD.

I don't think anyone here is suggesting that Bitcoins are superior to gold or silver as a long-term store of value.

"A small body of determined spirits fired by an unquenchable faith in their mission can alter the course of history." --Gandhi
hazek
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March 09, 2011, 06:42:25 PM
 #45

People absolutely don't just buy USD with their JPY if there's a cheaper option.

I think you are stuck on the intrinsic value of money and are neglecting its suitability for exchange.

Example 1: You want to buy oil and you need dollars to do so but you only have yen.  Solution: buy some dollars at the current exchange rate and then buy the oil.  

Example 2: You want to have pseudo-anonymity and a low transaction cost for a series of exchanges.  Solution: buy some BTC at the current exchange rate and then engage in your transactions.

In each example, another currency was better suited to the task at hand than the one you currently possessed, so you did an exchange first.  

Most merchants who price goods and services in BTC adjust their prices regularly to reflect the current exchange rate.  I sell wireless phone minutes for BTC, but my cost basis is in dollars.  So the BTC price of these minutes varies over the course of time.  If you want to refill your wireless phone anonymously, you can buy BTC at the current rate and then buy minutes from me with BTC.  Since my prices are tied to the BTC/USD exchange rate, you won't pay any more or less than if you bought the minutes directly in USD.

I don't think anyone here is suggesting that Bitcoins are superior to gold or silver as a long-term store of value.

I'm not stuck I just feel that the current price of BTCs does not validate the gained value of advantages through it's use for most new to this economy.

Btw in your example you're assuming no one has to pay any fees in exchanging between USD and BTC? And are you also assuming there's no other perhaps cheaper option to purchase the same service with another currency?

My personality type: INTJ - please forgive my weaknesses (Not naturally in tune with others feelings; may be insensitive at times, tend to respond to conflict with logic and reason, tend to believe I'm always right)

If however you enjoyed my post: 15j781DjuJeVsZgYbDVt2NZsGrWKRWFHpp
Cryptoman
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March 09, 2011, 06:59:15 PM
 #46

I'm not stuck I just feel that the current price of BTCs does not validate the gained value of advantages through it's use for most new to this economy.

Btw in your example you're assuming no one has to pay any fees in exchanging between USD and BTC? And are you also assuming there's no other perhaps cheaper option to purchase the same service with another currency?

Please enlighten us as to what you believe the current value of Bitcoins are, and don't forget to show your math.  I am also interested in hearing about other peer-to-peer, pseudo-anonymous, digital cryptocurrencies.

"A small body of determined spirits fired by an unquenchable faith in their mission can alter the course of history." --Gandhi
hazek
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March 09, 2011, 07:27:52 PM
 #47

I'm not stuck I just feel that the current price of BTCs does not validate the gained value of advantages through it's use for most new to this economy.

Btw in your example you're assuming no one has to pay any fees in exchanging between USD and BTC? And are you also assuming there's no other perhaps cheaper option to purchase the same service with another currency?

Please enlighten us as to what you believe the current value of Bitcoins are, and don't forget to show your math.  I am also interested in hearing about other peer-to-peer, pseudo-anonymous, digital cryptocurrencies.

Don't be childish, it's impossible to know. But I do see a 1 to 4 bid to ask ratio and I do know it's too high. Only the market knows how much though.

My personality type: INTJ - please forgive my weaknesses (Not naturally in tune with others feelings; may be insensitive at times, tend to respond to conflict with logic and reason, tend to believe I'm always right)

If however you enjoyed my post: 15j781DjuJeVsZgYbDVt2NZsGrWKRWFHpp
Steve
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March 09, 2011, 08:33:27 PM
 #48

Some people posting on this thread seem to believe bitcoins have no intrinsic value.  That is simply not the case.  Bitcoins can be readily transferred electronically, mathematics and a widely distributed system of trust ensure their limited supply, transactions are pseudo-anonymous, they are impossible (practically speaking) to double spend.  It's incredulous to me that people could even imagine that bitcoins have no intrinsic value in the face of these facts.  It's true that if hoarders dumped their hoards on the market, the prices would fall, but certainly not to zero...and the hoarders would have little rational economic incentive to do that (I mean, it's not like a run on a bank...due to intrinsic value, it is more like a stock and as prices fall, they would find a natural level of support).

In fact, given these properties, one could argue that bitcoins have far greater intrinsic value than gold (which has similar intrinsic value, but is stuck in the physical world).

I strongly believe you are wrong in regards with the bold part because if the hoarders wont sell and the prices stays too high no one is going to buy and the BitCoin economy wont grow. The sooner these hoarders realize that and give in and start selling the better it is for the growth of the BitCoin economy thus they have a strong incentive to sell and lower the price to a more reasonable one.

And IMO and I'm pretty sure I'm not alone thinking like this, $0.90/BTC although looking great to someone new just finding out about BitCoins IS to high for the current volume and interest and especially the bid vs ask ratio.

What I meant was that the hoarders would have little (or less) incentive to sell as the price fell and that would create a floor under the value of bitcoins (rather than falling to a value of zero as an ealier post implied (based on what I considered a flawed argument that bitcoins have no intrinsic value)).

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March 09, 2011, 08:48:09 PM
 #49

I'm not stuck I just feel that the current price of BTCs does not validate the gained value of advantages through it's use for most new to this economy.

What I don't get is why the exchange rate of BTC would have any affect at all on the adoption and growth of bitcoins.  They could be worth $0.10, $1, $10 or $1000 and I don't think it would make a difference.  But, I can see argument that exchange rate volatility is a hinderance to adoption and use.  If the price moves in large swings over short periods of time, people will be less confident in holding and using bitcoins in commerce.  And that is why we need lots of active BTC traders...people willing to buy as the price falls and unload as it rises in an effort to profit from the volatility (reducing volatility in the process).

(gasteve on IRC) Does your website accept cash? https://bitpay.com
barbarousrelic
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March 09, 2011, 08:49:34 PM
 #50

I'm not stuck I just feel that the current price of BTCs does not validate the gained value of advantages through it's use for most new to this economy.

What I don't get is why the exchange rate of BTC would have any affect at all on the adoption and growth of bitcoins.  They could be worth $0.10, $1, $10 or $1000 and I don't think it would make a difference.  But, I can see argument that exchange rate volatility is a hinderance to adoption and use.  If the price moves in large swings over short periods of time, people will be less confident in holding and using bitcoins in commerce.  And that is why we need lots of active BTC traders...people willing to buy as the price falls and unload as it rises in an effort to profit from the volatility (reducing volatility in the process).
The exchange rate should have no effect on peoples' willingness to adopt Bitcoin. Extreme volatility in exchange rate, however, may have a negative effect.

Do not waste your time debating whether Bitcoin can work. It does work.

"Early adopters will profit" is not a sufficient condition to classify something as a pyramid or Ponzi scheme. If it was, Apple and Microsoft stock are Ponzi schemes.

There is no such thing as "market manipulation." There is only buying and selling.
hazek
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March 09, 2011, 09:53:21 PM
 #51

I'm not stuck I just feel that the current price of BTCs does not validate the gained value of advantages through it's use for most new to this economy.

What I don't get is why the exchange rate of BTC would have any affect at all on the adoption and growth of bitcoins.  They could be worth $0.10, $1, $10 or $1000 and I don't think it would make a difference.  But, I can see argument that exchange rate volatility is a hinderance to adoption and use.  If the price moves in large swings over short periods of time, people will be less confident in holding and using bitcoins in commerce.  And that is why we need lots of active BTC traders...people willing to buy as the price falls and unload as it rises in an effort to profit from the volatility (reducing volatility in the process).

Really? It's hard to understand for you how the rate of exchange could play a role in whether or not someone decides to give BitCoins a chance?

Tell me something, if I show you a brand new invention that you might not even fully understand how it works would you be more willing to buy one for a cheap price or buy one if it were really expensive? I mean geesh use some common sense will ya..

My personality type: INTJ - please forgive my weaknesses (Not naturally in tune with others feelings; may be insensitive at times, tend to respond to conflict with logic and reason, tend to believe I'm always right)

If however you enjoyed my post: 15j781DjuJeVsZgYbDVt2NZsGrWKRWFHpp
hazek
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March 09, 2011, 09:54:47 PM
 #52

I'm not stuck I just feel that the current price of BTCs does not validate the gained value of advantages through it's use for most new to this economy.

What I don't get is why the exchange rate of BTC would have any affect at all on the adoption and growth of bitcoins.  They could be worth $0.10, $1, $10 or $1000 and I don't think it would make a difference.  But, I can see argument that exchange rate volatility is a hinderance to adoption and use.  If the price moves in large swings over short periods of time, people will be less confident in holding and using bitcoins in commerce.  And that is why we need lots of active BTC traders...people willing to buy as the price falls and unload as it rises in an effort to profit from the volatility (reducing volatility in the process).
The exchange rate should have no effect on peoples' willingness to adopt Bitcoin. Extreme volatility in exchange rate, however, may have a negative effect.

And what do you think does an unequal bid vs ask ratio spell? Stability of the rate?

My personality type: INTJ - please forgive my weaknesses (Not naturally in tune with others feelings; may be insensitive at times, tend to respond to conflict with logic and reason, tend to believe I'm always right)

If however you enjoyed my post: 15j781DjuJeVsZgYbDVt2NZsGrWKRWFHpp
gusti
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March 09, 2011, 09:57:55 PM
 #53

I'm not stuck I just feel that the current price of BTCs does not validate the gained value of advantages through it's use for most new to this economy.

What I don't get is why the exchange rate of BTC would have any affect at all on the adoption and growth of bitcoins.  They could be worth $0.10, $1, $10 or $1000 and I don't think it would make a difference.  But, I can see argument that exchange rate volatility is a hinderance to adoption and use.  If the price moves in large swings over short periods of time, people will be less confident in holding and using bitcoins in commerce.  And that is why we need lots of active BTC traders...people willing to buy as the price falls and unload as it rises in an effort to profit from the volatility (reducing volatility in the process).

Really? It's hard to understand for you how the rate of exchange could play a role in whether or not someone decides to give BitCoins a chance?

Tell me something, if I show you a brand new invention that you might not even fully understand how it works would you be more willing to buy one for a cheap price or buy one if it were really expensive? I mean geesh use some common sense will ya..

Rate exchange is absolutely neutral for anyone using BTC to buy or sell things, the higher the rate, the few BTC you will need to buy or sell the same goods. Think of the convenience instead.

If you don't own the private keys, you don't own the coins.
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March 09, 2011, 10:02:42 PM
 #54

And what do you think does an unequal bid vs ask ratio spell? Stability of the rate?

I'd think there's probably a technical reason why the number of bids fell dramatically in the past few days ;-)

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hazek
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March 09, 2011, 10:15:48 PM
 #55

Rate exchange is absolutely neutral for anyone using BTC to buy or sell things, the higher the rate, the few BTC you will need to buy or sell the same goods. Think of the convenience instead.

I agree. But what if the rate is too high and I buy BTCs and then a month later before I spend them the rate falls and prices readjust and I just lost all the value? Hmmmm?

How is this so tough to get, I really don't understand.

My personality type: INTJ - please forgive my weaknesses (Not naturally in tune with others feelings; may be insensitive at times, tend to respond to conflict with logic and reason, tend to believe I'm always right)

If however you enjoyed my post: 15j781DjuJeVsZgYbDVt2NZsGrWKRWFHpp
hazek
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March 09, 2011, 10:21:55 PM
 #56


bid vs ask ratio from MtGox website is 38 vs 126 right now. So unless you're suggesting that because of the move people who'd normally put in bids didn't have access to the site I don't see how that event could have had any effect.

My personality type: INTJ - please forgive my weaknesses (Not naturally in tune with others feelings; may be insensitive at times, tend to respond to conflict with logic and reason, tend to believe I'm always right)

If however you enjoyed my post: 15j781DjuJeVsZgYbDVt2NZsGrWKRWFHpp
barbarousrelic
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March 09, 2011, 10:27:37 PM
 #57

Bid/ask ratio is not a reliable figure for two reasons:

1) Dark pools
2) Bids and asks that are far from the current trading price would not really affect trading. There are currently well over $10,000 worth of asks above BTC 1.05 .  If I wanted to, I could put in a ton of bids or asks at prices nobody is ever going to trade at, but I seriously doubt these are going to affect near-future prices.


I think if you wanted to predict future prices you'd have to look at the number of bids and asks within, say, 5% of the last traded price. That number, as are all numbers when predicting the future, is entirely subjective.

Do not waste your time debating whether Bitcoin can work. It does work.

"Early adopters will profit" is not a sufficient condition to classify something as a pyramid or Ponzi scheme. If it was, Apple and Microsoft stock are Ponzi schemes.

There is no such thing as "market manipulation." There is only buying and selling.
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March 09, 2011, 10:28:18 PM
 #58

bid vs ask ratio from MtGox website is 38 vs 126 right now. So unless you're suggesting that because of the move people who'd normally put in bids didn't have access to the site I don't see how that event could have had any effect.
I'm suggesting that we're likely only seeing a fraction of the bids. Prior to the server move there were bids at, for example, the 1c mark. It makes very little sense to me for all these bids to have been pulled by users at exactly the same time that MtGox moved servers. It makes more sense that tcatm's experience at Bitcoincharts is true also for MtGox's market depth reporting.

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March 09, 2011, 10:39:49 PM
 #59

I have thought on this, I think the answer is yes and no. Yes because the early adopters have an advantage over later adopters. However, it has a built in stop mechanism that will eliminate the necessity to gain supporters. After the fulfillment of the 21 Million BTC, there is no advantage whatsoever. The supply and demand will be purely market driven. It does make sense to provide an incentive to early adopters, but one that equalizes. As with all currencies, the flow of the currency is more important than the holding of currency.

The problem is there will be no Quantitative Easing possible. The Savers have the advantage in the long run, but then again they always did have the advantage no matter what the currency.  Deflationary pressure will strip the advantage of saving if allowed to occur. All modern currencies try everything possible in order to avoid deflationary pressures because it hurts. The irony, is that it suppose to hurt. It means people have been to greedy and not sharing in growth. You can delay it, but not avoid it.


Net Worth = 0.10    Hah, "Net" worth Smiley
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March 10, 2011, 03:39:55 AM
 #60

Really? It's hard to understand for you how the rate of exchange could play a role in whether or not someone decides to give BitCoins a chance?

Tell me something, if I show you a brand new invention that you might not even fully understand how it works would you be more willing to buy one for a cheap price or buy one if it were really expensive? I mean geesh use some common sense will ya..

A key characteristic of money is that it's divisible without loss of value.  Bitcoin is divisible (to 8 decimal places anyway).  It wouldn't matter to me if one bitcoin was $1 or $10,000.  The exchange rate is nothing more than a momentary point of reference.  What does matter to me is what the price of bitcoin was yesterday and what it will be tomorrow relative to what it is today.

So, to answer your question, if you showed me some new invention and it was really cheap, sure, I would buy it.  If it was really expensive, I would still buy 1/10000 of it.

When I first started looking into bitcoin, the only thing that I really cared about was the price history chart...but the values on the y-axis were irrelevant from my perspective.

(gasteve on IRC) Does your website accept cash? https://bitpay.com
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