Cryptocurrency Is Not a Ponzi Scheme

Samantha Standish
Dec 27, 2018 · 4 min read

“If you think cryptocurrency is a pyramid scheme, you don’t understand cryptocurrency.”

Cryptocurrency is not a Ponzi scheme. A Ponzi scheme is when you invest in a business, and the profit that you receive from your investment isn’t from the investment itself but from money taken from newer investors. A Ponzi scheme is deliberate and intentional fraud.

In a tangible, real-world example, Social Security is a kind of legal Ponzi scheme because the money that individuals withdraw from the program isn’t from their investment into the program. The money that they withdraw comes from the new investors in the program. If there are no new investors into the Social Security program, there’s no money to withdraw.

People think Social Security is like a savings account when, in reality, it functions like Ponzi scheme. If there are no new investors or less investors than the number of people drawing on the funds, then there aren’t enough funds to pay out to the previous investors.

You haven’t really invested in anything when you pay into Social Security. You’ve paid money to pay other people, and in order for you to get paid, others have to pay into the system at the time that you’re withdrawing from it. It requires new investors to work.

Cryptocurrency is not that. It doesn’t depend on new investors to use the cryptocurrency system. You and I can trade cryptocurrency right now, and no new people need be involved because you and I aren’t trying to make money from cryptocurrency. We’re using cryptocurrency to conduct business. I have a book. You pay me a certain number of Dash (or Bitcoin or Bitcoin Cash or Litecoin or DigiByte), and I give you the book. It’s a direct, person to person transaction that doesn’t need anyone else to get involved for the transaction to happen. That’s cryptocurrency.

Now, there are blockchain projects that issue coins and tokens that can mimic or even be a Ponzi scheme, but cryptocurrency itself is not a Ponzi scheme because cryptocurrency is not an investment in an asset that’s supposed to net you a return. Cryptocurrency is an investment in a process that facilitates transactions. Cryptocurrencies aren’t meant to give you a return on your investment because they’re not meant to be investments in a “thing.” They’re meant to be a structure that facilitates transactions. They’re a means to document interactions of “value” between humans.

However, you can speculate on anything and make money at it. In this early phase of cryptocurrency, many people are doing just that hoping to make money when cryptocurrency becomes adopted globally, and the price to get into the system goes up. That doesn’t make cryptocurrency a Ponzi scheme because you’re not receiving a return from new investors. If you want to make money from “new investors,” you have to go out and trade your cryptocurrency. You trade your cryptocurrency on the open market for a return from anyone willing to pay the price for what you’re selling. No one’s promising you anything. You’re not promising anyone anything.

Bitcoin wasn’t designed to be an asset of speculation. It was designed to create the ability to conduct verifiable, person to person transactions. No one’s being duped. If you invest in Bitcoin, you would be investing in its ability to perform that function because that’s what Bitcoin is. It’s a distributed ledger of direct, person to person transactions.

Speculating on the price to participate in the Bitcoin system is something else entirely. Many people are doing that and then rebilling the purpose of Bitcoin as a “store of value” by holding the units of participation (Bitcoin), but this is speculation.

Betting on the future value of something is not a Ponzi scheme. A Ponzi scheme is the deliberate attempt to defraud investors into thinking that their investment is paying high returns by giving the investors money siphoned off of new investors.

If you buy Bitcoin, no one’s giving you anything. If you want a “return” from your Bitcoin, you have to buy it at a low price and sell it when the price goes up. This is you taking that course of action. This is you speculating and trading. No one’s giving you anything. No one’s guaranteeing you anything. You may lose your investment, and it would be your fault because you took the risk of speculating on something that wasn’t designed for that purpose.

Some people hold Bitcoin and other cryptocurrencies to sell at a later date when the prices go up. They want to make money speculating.

Others are holding cryptocurrencies until mass adoption happens, the prices level out, and the system is being used for its intended purpose — as an exchange platform. These people are investing in the system itself to help it grow. They want financial change.

Others are doing a little of everything — holding cryptocurrencies as a store of value, holding cryptocurrencies to invest in the new system, and spending cryptocurrencies to get the new system moving and viable.

One thing is clear if you invest in cryptocurrency, you’re not investing in a business. You’re not investing in an asset. You’re investing in the ability to participate in the cryptocurrency system. You're investing in the ability to conduct transactions within that system according to the protocols of that system. That’s all you’re doing. And no one’s promising you anything, not even the future existence of the system itself. In that sense, it’s all a bet.

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