Is Crypto Really a Ponzi Scheme?

To its backers, crypto has been the revelation book of finance for centuries. To its critics, crypto is a mere Ponzi scheme. A look at the world’s first cryptocurrency, Bitcoin (BTC), helps solve the puzzle.

According to data from CoinMarketCap, in the last couple of months, the market has fallen by a whopping $600 billion. Bitcoin has fallen to $47K from a record-breaking $69K in December of 2021.

But when looking at the bigger picture, the crypto industry has grown drastically from year to year, and the numbers boldly confirm that. For instance, a few months back, Bitcoin had broken the milestone of a $1 trillion market cap, while the total market cap of the crypto market has spiked to over $3 Trillion. These stats clearly show the rise of decentralized finance and cryptocurrencies while traditional banking is experiencing several backlashes.

Institutional investors have started to pay attention! Even country governments have spotted possibilities within the industry and invested in Bitcoin, leading to believe that crypto doesn’t seem too far from displacing the dollar.

But things in the crypto market can change dramatically in weeks, days (or even hours sometimes). Through these outrageous ups and downs, many people can’t help themselves but wonder: Is crypto the future of finance? Are we soon going to buy NFTs and put them in a metaverse space instead of the good ol’ pictures on the wall? Is crypto the solution to the backlashes of the traditional systems or a more advanced version of a Ponzi Scheme?

The role of blockchain technology

Some of the biggest challenges with the traditional banking models include (mostly) the policies, regulations, and interest rates, which require multiple long processes. A crypto payment model showed up to offer services never available before, allowing people to hold their own assets anonymously.

A decentralized banking process presented by Satoshi Nakamoto was seen as the ideal solution to the complicated banking system. While the decentralized world has its own cracks, it also has several advantages that people cannot afford to miss out on.

The impact of digitalization on the banking system

If you’re involved in the financial market (primarily online), you’ve probably come across terms such as blockchain, decentralized finance (DeFi), cryptocurrencies, NFTs, etc. Presently, we are experiencing numerous changes, including a significant increase in transactions daily, and cryptocurrencies are a great factor that is boosting these changes.

While fiat has been the go-to payment currency for centuries, the advance in technology has made way for a new and more advanced form of money– cryptocurrencies. One of the major advantages the crypto banking system has over the traditional one is decentralization, faster transactions, and anonymity, among others.

Is crypto a Ponzi Scheme?

Since the launch of a recent US Bitcoin exchange-traded fund (ETF), Bitcoin has started to look like a Ponzi scheme for many outsiders. This belief mainly comes due to the potential of exchange-traded funds to draw large sums of money to Bitcoin, allowing investors who got to the bottom to go out of the top with big profits, making the pyramid collapse.

The official regulation of Bitcoin and other cryptocurrencies, as well as the creation of central bank digital currencies (CBDC), is seen as a solution before a possible collapse occurs, according to South China Morning Post.

But the number of funds Bitcoin ETFs might attract could reach multiple of the present crypto market cap if crypto-mania persists, especially after receiving a lead from the world’s biggest equity market. This report suggests legal money flowing into Bitcoin through ETFs could replace the illicit money represented by Bitcoin, risking an exodus of early investors that would take profits, leaving the rest holding onto mere digital numbers.

How likely is that to happen?

Why the future of decentralized finance banking looks way different than a Ponzi Scheme

Major grounds exist to believe Bitcoin (BTC) and crypto are not Ponzi schemes. Taking Bitcoin, the first cryptocurrency, as an example, we go through some legit reasons why crypto is not a Ponzi Scheme.

A Ponzi scheme promises more than a market can offer or accomplish. Conversely, Bitcoin (BTC) cannot make such a promise as it doesn’t even have a representative that could do so. The thought that people will profit financially from Bitcoin in the first place is merely a misconception to many.

Secondly, a Ponzi scheme requires joining new members to maintain the current stream. This is another point, once again, that Bitcoin (BTC) doesn’t relate to. Instead, Bitcoin can maintain the same price value with the same number of holders or participants.

So far, Bitcoin (BTC) and crypto have proven to be ground-breaking inventions that are here to stay (unlike a Ponzi Scheme). While the future looks bright, there are many challenges the industry has to overcome to prove its skeptics wrong and attract new supporters.