Bitcoins: Not a Ponzi Scheme, Here’s Why
A properly planned good with inherent value as currency can become widely accepted.
I read “Bitcoins: The Second Biggest Ponzi Scheme in History” by Gary North on the subway in San Francisco. I struggled to follow North’s argument structure, so below I’ll state the assumptions that North makes, how he fits them together, and the conclusions drawn. Please contest, confirm, and/or supplement both definitions and logic.
TL;DR:
North’s argument is dependent on the assumptions he makes. If one assumption is false, the logic fails.
If the definition of money is something that is valuable for its own sake, develops out of market exchanges, and has a predictable exchange rate and the definition of a Ponzi scheme is an investment that does not serve the consumer and Bitcoin is only bought as a capital asset with no intention to be used for exchange then Bitcoin is a Ponzi scheme.
If you’d like to keep reading, I provide one response to refute each of North’s definitions. Definitely add more in the comments if you have them!
North’s Definitions
1) Money
“That which did not function as money before, now functions as money. Something that was valuable for its own sake, most likely gold or silver, becomes valuable for another purpose, namely, the facilitation of exchange…In this scenario, something that had independent value becomes the focus of traders, who find that their ability to buy and sell increases as a result of the use of this commodity. Money develops out of market exchanges. Money was not used for its own sake initially, but it becomes widely used as money as a result of innumerable transactions within the economy…It is the predictability of money’s market exchange rate that makes it money.”
Response:
What is the dollar? It is certainly not valuable “for it’s own sake”. It’s inherent value is to be a currency. It took anywhere from 10 to 100 years for trust in the dollar to materialize and for it to be widely used in market exchange. The dollar was adopted as the U.S monetary unit in 1785, and in 1861 general circulation began.
2) Austrian School’s Theory of Money and why you buy money
“People buy money because it has not fallen in price. But it has also not gone up in price much, either. It is predictable. Why? Because it is held in reserve by a large number of people over a large geographical area. It has become money through tradition, through experience, and through endless numbers of exchanges on a voluntary basis. It has proven itself in the marketplace as a means of facilitating exchange, and thereby as a means of preserving value over time.”
Response:
All money has to have an origin. In the beginning it could not rely on tradition, experience, or endless number of exchanges. It started at 0.
3) Ponzi Scheme
“First, someone who no one has ever heard of before announces that he has discovered a way to make money…Second, the individual claims that a particular market provides unexploited arbitrage opportunities. Something is selling too low…The individual who sells the Ponzi scheme makes money by siphoning off a large share of the money coming in. In other words, he does not make the investment.”
Response:
SEC definition of Ponzi scheme: “A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors.” A Ponzi scheme maintains the same fund size, as any new money put in is distributed out. The market cap for Bitcoin has increased over time. Bitcoin is a marketplace, not a Ponzi scheme.
Sidenote: This sounds like every startup. Find a market inefficiency, start solving it, raise money from outside investors, and sell for millions of dollars.
4) Bitcoin’s current and future use and why you are buying Bitcoin
“This digital so-called money will not be used to facilitate exchange. Nobody is going to be getting rid of an asset that has moved from $2 to $1,000 in one year in order to buy pizzas. People want to hang onto it, refusing to sell, in the hopes that it will go to $2,000. This is the classic mark of Ponzi scheme psychology. People do not buy the investment for the benefits that the investment provides as an investment, in other words, because it is a capital asset. They buy it only because it has gone up in price. They expect this to continue. You are thinking of buying Bitcoins, not because Bitcoins will serve as a means of exchange, as originally argued, but because you want to get back lots more money than you paid for them”
Response:
Making assumptions on millions of people’s thoughts is dangerous. I bought Bitcoin because I believe it will be a medium of exchange in the next 5 years, and I’d like to gradually own a larger amount to be ready for that time.
Analysis
I do agree with North’s secondary point in the article. The current volatility of Bitcoin price and rapid inflation causes consumers to view Bitcoin as a capital investment and retain it, thus making it difficult for market exchanges to take place. Where we differ is in his main point, that the price of Bitcoin will never be predictable because Bitcoin is not valuable “for it’s own sake” and has not naturally arisen out of market exchange like gold and silver. Gold and silver are not valuable “for their own sake”. They are deemed valuable by humans because they are shiny and have been used for jewelry. I’d argue that no material has absolute value, only relative value dependent on human use. Additionally, just because gold and silver naturally became a medium of exchange, does not mean that (1) all mediums of exchange must follow their natural path and (2) that a natural, rather than planned, currency is best. It’s certainly possible for a properly planned good with inherent value as currency to become a widely accepted currency. Let’s wait 10 years and find out!
