I highlighted a couple parallel perspectives to help the newbies visualize the dynamics of how bitcoin miners create and distribute the currency first (like the central banks do with fiat), and how a forever increasing price value of the distributed currency is required to keep the system from collapsing into deflation (in bitcoin's case, collapsing into "unprofitably for miners" who leave the system because they cannot turn a profit).
scheme is a type of confidence scam where people who get a hold of the debt based currency first or were early bitcoin adopters who bought it cheap,
earn unusually high returns on their investment because they are actually being paid from later investors. If investors try and
withdraw their original investment from the Ponzi operator cash out of their bitcoin and get back into the fiat realm, or in the case of debt based currency, go bankrupt (don't pay the debt money back)
the scheme the bitcoin price (asset prices in the debt fiat parallel)
collapses because no actual profits exist (for the bitcoin miners)
and there is not enough money to
return the deposited amounts purchase/maintain/power their mining equipment in the bitcoin parallel, or keep asset prices supported in the debt money example
Similarly, a pyramid scheme
is a type of confidence scam where people who "enroll" by paying a certain amount of money are made to believe they can make a large return on their investment by recruiting other people and receiving some portion of their enrollment fee. The scheme collapses because it requires exponential growth, so it quickly runs out of new people to enroll. The person starting the pyramid scam, who didn't have to pay
an enrollment feetoday's higher bitcoin prices (or in the debt money example got to borrow it into existence at 0% and charge the next guy actual interest)
, makes money off
of all their referrals the price appreciation of bitcoin (an aggregate increase in total debt in the debt money parallel)
; while the people at the bottom parts of the pyramid (late adopters, or those with low credit scores paying the highest rates of interest in the debt currency parallel)
, who cannot find anyone new to refer(cannot find an investment for borrowed funds with a rate of return higher than they borrowed it at in the debt money parallel)
, are left with no return on their investment compared to the earlier bitcoin adopters (or those who got to borrow debt money at 0% in the debt currency parallel)
no person several individuals "at the top" who collects money paid for bitcoinssell the vast majority of all newly mined bitcoins on the open market
(hopefully at a profit like the profits the central bankers lock in immediately by charging you a higher interest rate than the low one they borrowed it for). These, bitcoins are bought and sold on public exchanges
amongst members of the general public.BitCoin works just like cash(which is debt based currency)
Sorry if I paraphrased a bit, but the "parallel concept in reference to a phenomenon" is not a simple method of explanation. But in this case, since increasing demand for most things affects its price upwards, then there are always those who are able to capitalize first when the price is low. In our cases, the capitalists are early bitcoin adopters getting cheap BTC and central bankers getting debt currency loans at 0%.
Commodity distribution often comes with varying pricing patterns often associated with ponzi dynamics especially in the growth phase its life cycle. This is why bitcoin has been loosely referred to as a ponzi, and why people say "you can't taper a ponzi scheme"(why the central bank can't raise interest rates without triggering thousands of bankruptcies), etc..
ELI5 - Nowadays, the term: "Ponzi" is used loosely, almost as slang to describe certain extreme supply/demand/pricing conditions (where the growth phase is viewed more romantically than any decline phase) that we associate with simple chain letters, pyramid schemes, and how Bernie made off with your money. All systems are dynamic, and endless growth is impossible, which is why a system that cannot withstand a contraction phase is simply referred to as a ponzi nowadays. Bitcoin is surviving its de-growth phase, therefore, it is not a ponzi. It will be interesting to see if our debt currency system can survive a de-growth phase (rising central bank interest rates) without the world running to bitcoin, because gold is cumbersome. Thanks for bearing with my lack of grammatical perfection.
Interesting paraphrasing here, I largely agree with what you're saying..
I started separate reply going into what people define ponzi to be because that itself is part of the answer to the thread.
I found that as you said, markets are dynamic and the ponzi scheme in its traditional form is not very dynamic at all. It is almost the simplest form possible.
But lets not forget that what happened to Madoff is what's happening to alot of countries.
Debt being repaid by refinancing and issuing new debt is essentially what even the United States are doing by raising their debt ceiling.