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Author Topic: Ponzi scheme?  (Read 2797 times)
B!0HaZard
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May 01, 2011, 05:52:40 PM
 #1

So, I've been mining for 2 days now and talked to my dad about mining. He says that Bitcoin is a Ponzi scheme because we're making money even though no product is being sold or something. From what I can understand, this is not the case, but why isn't it the case? What's the difference between Bitcoin and a Ponzi scheme? And what are our GPUs calculating?
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Ulysses
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May 01, 2011, 05:56:48 PM
 #2

Bitcoin is a bubble, not a ponzi scheme, because nobody promise you to pay dividends on your investment.

Most people here believe that it's a bubble, that will never pop (like gold bubble) because of monetization.
ploum
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May 01, 2011, 05:58:49 PM
 #3

"despite the fact that speculation has nothing to do with a ponzi scheme, it is now usual for any economy illiterate to call anything that involves risks a ponzi scheme. If you can lose money, it's ponzi. First, you have to explain them than Ponzi is not a pasta brand" (self-citation from http://ploum.net/post/bitcoin-bubble )

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tomcollins
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May 01, 2011, 06:00:55 PM
 #4

So, I've been mining for 2 days now and talked to my dad about mining. He says that Bitcoin is a Ponzi scheme because we're making money even though no product is being sold or something. From what I can understand, this is not the case, but why isn't it the case? What's the difference between Bitcoin and a Ponzi scheme? And what are our GPUs calculating?

People are using it for something though.  Right now there is a speculative bubble since there aren't *that* many things you want to use it for unless you are a true believer, but that doesn't mean there won't be useful things to use it for.

By mining you are recording transactions made by other people.
BioMike
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May 01, 2011, 06:01:35 PM
 #5

Your GPU is calculating to get a hit with a specific size of hash. If you get the hit, transactions get incorporated/fixed into the network. You get paid for that. What you're selling is a service (computing power), which costs electricity and hardware for you.
epii
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May 01, 2011, 06:13:18 PM
 #6

If you contribute to a distributed computing project like SETI@home or Folding@home, most of your donated CPU cycles will be "wasted" anyway - distributed computing projects like this are useful for computations that require a lot of brute force, and brute force approaches are always inefficient.  Only once in a blue moon will a contributor find a data point that is actually useful.  The choice is between doing a computation inefficiently, or not doing it at all.

So yes, if you mine, most of your cycles "go to waste", but the result of the computation as a whole is that Bitcoin is extremely secure.  The more people who mine, the more secure it is.

Vires In Numeris.
grondilu
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May 01, 2011, 06:19:07 PM
 #7

He says that Bitcoin is a Ponzi scheme because we're making money even though no product is being sold or something.

This is somehow a weird assertion.  Can't money be considered as a product by itself ?

Making a monetary tool is not that easy.  You can try using seeshells, or numbers on pieces of paper.  And yet everyone will think those are not "good" money.  Money needs some properties to be considered as a good money.

A 100$ federal reserve note is not just a piece of paper with ink.  It has some security features that prevent it from counterfeiting, for instance.  It has some value apart from its facial value.  It has some value as something that is difficult to be counterfeited.

A monetary tool is a product just as a hammer is a product.  A hammer is usefull to nail nails, and a monetary tool is usefull to exchange value and trade stuffs.

Bitcoin is much a better monetary tool than federal reserve notes.  It has much better security against counterfeiting.  It can be divided much easier.   And above all, it can easily be sent through the internet.

That's why mining  bitcoin is indeed a selling of a product or service: it's a financial service given to the bitcoin community.
epii
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May 01, 2011, 06:24:32 PM
 #8

Also, if you were going to accuse Bitcoin of being a "scheme", it would make more sense to call it a pyramid scheme than a Ponzi scheme.  A Ponzi scheme, as Ulysses says, promises to pay dividends on an investment.  A pyramid scheme makes an investment that can only be profitable to a few people seem like it can be profitable to many people - not guaranteeing a payout, but making an enormous risk seem quite small.

Both are based on the idea of an economic cycle as follows:
1) Put money in.
2) Huh
3) Get more money out.

All investing looks like this, but with a Ponzi/pyramid scheme, there is absolutely nothing in the "Huh" slot (while usually, for example, some product would be produced).  So if it were never possible to do anything with bitcoins except buy other currencies, it would start to resemble a pyramid scheme a bit.  Fortunately, this is not the case, even if there's not much you can do with it yet.

Vires In Numeris.
grondilu
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May 01, 2011, 06:43:18 PM
 #9

So if it were never possible to do anything with bitcoins except buy other currencies, it would start to resemble a pyramid scheme a bit.

Not even in this case.  I would call it a metacurrency, but some people would call it a reserve currency.  It would still be usefull, and several currencies have been used like this in history (the écu, predecessor of the euro, to name one).
epii
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May 01, 2011, 07:13:37 PM
 #10

So if it were never possible to do anything with bitcoins except buy other currencies, it would start to resemble a pyramid scheme a bit.

Not even in this case.  I would call it a metacurrency, but some people would call it a reserve currency.  It would still be usefull, and several currencies have been used like this in history (the écu, predecessor of the euro, to name one).

Put much more generally then, avoiding buzzwords like "pyramid scheme", the more active the Bitcoin economy becomes, the more Bitcoins are a "conventional" and "safe" investment.  The stability of a pure metacurrency is extremely hard to predict, because the demand is based on psychological whims that are entirely detached from the needs or wants of consumers (which are comparatively easy to predict).  Even if Bitcoin only gets a strong black-market economy, that would be enough.

Vires In Numeris.
B!0HaZard
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May 01, 2011, 07:50:23 PM
 #11

Oh, sorry, he did say pyramid scheme, but in the translation it became Ponzi by mistake.
Sief
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May 01, 2011, 07:55:09 PM
 #12

It will be a pyramid scheme until a certain theoretical point where it reaches a level of implementation where it's widely accepted and liquid enough for people to actually use it.

Right now it's just like any share out there that you might by at an excahnge, except a few vendors glorify it by accepting payments. When trading volume from people buying into BTC is exceeded by actual commerce, I say it's not a pyramid scheme anymore. Arbitrary, I know.

This is not a bitcoin address; do not send anything to it: 112sNU2PA3odvzvFvZtbu1tR2pr88ssrpk
B!0HaZard
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May 01, 2011, 08:02:08 PM
 #13

So you're saying it technically IS a pyramid scheme? But pyramid schemes are illegal  Huh
edd
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May 01, 2011, 08:04:40 PM
 #14

Tell that to Amway.

Still around.
B!0HaZard
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May 01, 2011, 08:08:09 PM
 #15

So because Bitcoin isn't based on rewards for recruiting, it isn't a pyramid scheme?
epii
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May 01, 2011, 08:13:08 PM
 #16

So because Bitcoin isn't based on rewards for recruiting, it isn't a pyramid scheme?
Certainly not in the strict sense.  In the broad sense of "early adopters reap the rewards of later adopters' stupidity", only in the worst case scenario.

Vires In Numeris.
B!0HaZard
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May 01, 2011, 08:19:57 PM
 #17

I'm 16 and doing this as an experiment because I'm studying and unemployed. I therefore need my parents' permission to rape their electric bill.

I'm mining with an HD 5850 and an HD 5650M, pulling 400 Mhash/s and getting about 3 BTC/day with the recent difficulty increase (mining for Deepbit). So no, I'm not using a weak GPU and there's a good reason why I'm even discussing it with someone who knows nothing about the system. I didn't know what a pyramid scheme was before he told me about 'em so I had just assumed it was legit when people told me. Also, English is my second language. At the age of 16, with no financial/economical experience and in a non-native language I have no idea what people are telling me ^^

But yeah, I've calculated that I should be able to pick up an SSD by the end of the month if this continues, so when he said it was illegal and that I should pull the plug, I just got a bit sad, mostly because I'd trusted that it was legit.
ploum
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May 01, 2011, 08:43:26 PM
 #18

Well, I would first congratulate you for asking your father. You are perfectly right: there are a lot of scam/illegal stuffs on the internet. At 16, you are not supposed to know them all and asking advice is the best way to do it.

Also, BTC involves money, which might look like gambling. Even if it is legal, there's probably an age limit. Beyond 18, you probably cannot sell BTC so better don't do it or ask your father to do it for you.

Last but not least: don't spend any money on BTC. Don't buy them. (you probably can't legally)

The smarter thing you can probably do right now is keeping your bitcoin for a few years (or spending them on some services that accept them).


All of this having been said, you can say to your father that bitcoin is not a pyramid scheme because you don't spend any money to enter it ;-)

Blog posts about Bitcoin - 1KdRBbhjo72CqKTrFsQed6s9NMrvwvrUkq
epii
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May 01, 2011, 08:43:53 PM
 #19

"Raping the electric bill" is of course an issue, but besides the relatively small investment of electricity, if you're not investing your savings into Bitcoin, you don't stand to lose anything by experimenting with it.  People are paranoid about pyramid schemes because there have been so many stories of people losing their life savings to them.  Bitcoin's implicit disclaimer is that anyone who sells legal tender to buy bitcoins is crazy... but perhaps crazy like a fox.   Wink

Vires In Numeris.
kgo
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May 01, 2011, 08:51:52 PM
 #20

It's not a pyramid scheme.  New people who start mining for coins don't have to pay a kick-back to their elders.  You're on the same footing right now (per Mhash/second) as people who have been mining since the beginning.  Of course they have more coins because they got in early, but you don't have to pay the higher-ups a tax, which is how pyramid schemes work.
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