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Is Crypto Really a Ponzi Scheme?

To its backers, crypto is 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, helps solve the puzzle.

bitcoin and fiat

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

But when looking at the bigger picture, the crypto industry has grown drastically year to year, and the numbers leave nothing to wonder about. For instance, a few months back, Bitcoin had broken a milestone of a $1 trillion market cap, while the total market cap of the crypto market has spiked to over $3000 billion.

These statistics are clear indicators of the rise of crypto finance, 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. Crypto doesn’t seem too far from displacing the dollar.

But the things in the crypto market can change dramatically in weeks, or days (or even hours sometimes!). Through these outrageous ups and downs, many individuals can’t help themselves but wonder: Is crypto the future of finance? Are we soon going to buy NFTs and put them on 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 decentralized technology

Some of the biggest challenges with the traditional banking models, which they created themselves, include (mostly) their own policies, regulation, and interest rates, which required multiple long processes to accomplish. A crypto payment model showed up to offer services never available before, with individuals being able 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 this system has its own cracks, it also has several advantages that people can hardly refuse to embrace.

The impact of digitalization on the banking system

traditional banking institutions

If you’re involved in the financial market (especially online), you’ve most probably come across terms such as blockchain, artificial intelligence (AI), cryptocurrencies, NFTs, and so on.

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 now, the advance in technology has made the way for a new and more advanced form of currency– cryptos. One of the major advantages the crypto banking system has over the traditional one are decentralization, faster transactions, and anonymity, among others.

Why crypto is seen as 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. Why do they believe so? 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 question: is bitcoin a Ponzi scheme?

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.

Bitcoin’s full market cap, including digitally or physically mined Bitcoins, for the moment, stands at around $900 billion. But the number of funds Bitcoin ETFs might attract could reach multiple of that sum if crypto-mania persists, especially after receiving a lead from the world’s biggest equity market.

This, the same report says, suggests legal money flowing into bitcoin through ETFs could replace the unlawful money represented by Bitcoin, and early investors could leave with profits by selling out, leaving the rest with nothing but digital numbers.

The future of crypto banking or a Ponzi Scheme?

By definition, Bitcoin and crypto are certainly not a Ponzi schemes. Taking Bitcoin, the first cryptocurrency, as an example, we go through some of the legit reasons why crypto is not a Ponzi Scheme:

  • A Ponzi scheme promises way more than a market can naturally offer or accomplish. On the other side, Bitcoin is not able to make such a promise as it doesn’t even have a representative that could do so. The thought that individuals will profit financially from Bitcoin in the first place is merely a misconception to many.
  • Secondly, a Ponzi scheme requires the joining of new members to maintain the current stream. A requirement that, once again, Bitcoin is not able to meet. Instead, Bitcoin can maintain the same price value with the same number of holders or participants. However, the price could also appreciate with fewer participants.

Also, Bitcoin’s revenue and value are generated through technology. Traditional banks charge a fee of at least 2% for payments such as banks, employees, and so on, while cryptocurrencies are capable to complete the same with less overhead and way quicker– thus, the transactions are more efficient and less costly.

This efficiency functions as a money-making industry worthy of investment. It meets the traditional business concept of “building a better mousetrap”. Anyone that doesn’t see this naturally generating worth is certainly missing a lot.

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Hekuran Gashi

A modern-day nerd who likes reading, boxing, and yeah, cartoons. Hekuran writes about Web 3.0, Gaming, NFTs, and Metaverse projects.