Removed.

[B!0HaZard]

Removed.

[Ulysses]

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]

"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 )

[tomcollins]

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]

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]

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.

[grondilu]

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]

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)
3) Get more money out.

All investing looks like this, but with a Ponzi/pyramid scheme, there is absolutely nothing in the "" 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.

[grondilu]

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]

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.

[Sief]

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.

[edd]

Tell that to Amway.

[epii]

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.

[ploum]

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 ;-)

[epii]

"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.  

[kgo]

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.

[draaglom]

The "honest" side of mining is that you are providing a service to the users of bitcoin - you are helping the currency to become more secure and more widely available, and getting paid (in bitcoins) for this. This doesn't account for much of mining's insane profitability though - that bit is because it is a huge bubble (if you are pessimistic) or because lots of people predict it will be the/a very important currency in the future (optimistic).

[marcus_of_augustus]

Tell your dad that bitcoin is the way of the future!

Put a watt meter on your mining rig and tell him you will pay him for the electricity it uses.

Bitcoin is not illegal. Tell him to let you succeed or fail on your own terms in life, how else will you learn?

You will look like a genius when they are worth $1,000 each.

[ploum]

Tell your dad that bitcoin is the way of the future!

Well, I would advice him to believe his dad instead of a bunch of lifeless anonymous spending their time on a forum. Seriously, it's very very hard to tell the difference between foolish people and visionary people. We take the risk because we are adult, we have the right to do what we want with our money that we earn. He can't. He's 16 and, statistically, have less experience in life which means he could be fooled easily.

(Some 16 people are obviously smarter than some 50 people but that's not the point here)

[epii]

+1 ploum, let's give the guy practical advice rather than ideological and idealistic advice.  This isn't worth creating some major dissent in his family, and if he doesn't play it carefully, he might not have the opportunity to get involved with Bitcoin at all.