Let’s be logical for a minute, shall we?
Could critics be right?
Throughout the Bitcoin word war, cryptocurrency enthusiasts have stood their ground for the most part. Most have brushed aside tirades from the likes of Jamie Dimon, Ajay Banga, David Gledhill, Jim Rickards, even Nouriel Roubini—who himself predicted the 2008 meltdown two years before it even happened. Experts have been predicting that this bubble will burst anytime soon.
Amidst all this, we’ve held on for dear life.
But the most critical question a reasonable individual has to ask in times like this—apart from the motives behind those with opposing values—is whether their arguments have any merit.
The possibility that they can be right and we could be wrong is a tough pill to swallow. But if we want to protect ourselves, wouldn’t it be in our best interest to objectively assess whether we are right or wrong? After all, we’ve got money at stake here.
One of the most commonly heard accusations is that “Bitcoin is a Ponzi.” To a supporter, this is a simple case of “they don’t understand what they’re talking about.” One can argue that central bankers and traditional economists are simply reluctant to change and are merely resisting the inevitability of a breakthrough technology driving them into obsolescence. However, it’s hard to believe that such experts in their fields would allow themselves to come off as ignorant in such a public and politically charged space. As experts, a more sophisticated attempt at a take-down (if that is what they’re trying to do) is expected of them (except for Jamie Dimon. He sunk his ship really quick).
When more than one expert is issuing warnings with no clear self-serving agenda, we have to stop and rethink the possible scenarios. In this case, there are two main possibilities:
1. We’re right: they don’t know what they’re talking about and/or are protecting their own interests.
2. They’re right: we are the ones who are missing something here.
Is Bitcoin a Ponzi scheme?
Why is this particular question of any importance? Because when a Ponzi scheme collapses, your money goes down with it. And the answer to this question is actually tricky. Many will be up in arms defending their cryptocoin of choice. But let’s put aside our blind fanaticism for a little while and objectively dissect the debate with an antithesis of our crypto utopia.
The increase in a token’s value is one of the perks of buying them and is in fact, the primary driving force behind mainstream ruckus. But the truth is that it was never the core value of blockchain technology despite it being the most appealing aspect to the general public. And it’s actually this same volatility that hinders it from mass adoption.
In the case of SegWit1x (BTC) and Bitcoin Cash (BCH), the race is on to become the go-to peer-to-peer network that will enable a fast and low-cost means of transferring value. The distributed ledger’s value proposition is what makes it a breakthrough technology and is supposedly what makes it valuable. As it stands, both are still in development and are working on making the systems reliable for massive scale use.
If either of them fails to deliver, then what backs the value of their tokens? Here’s where the legacy chain might see trouble. As of writing, SegWit1x has over 51,000 unconfirmed transactions and transaction fees are skyrocketing. Meanwhile, Bitcoin Cash—despite being the less popular chain—is processing an average of one block per nine minutes, and charging less than $0.20 per transaction on average.
If BTC keeps at its current sluggish and expensive state, it means that it’s failing as the peer-to-peer network of exchange that would supposedly offer a low-cost, high-speed value transfer. And if it’s not working as promised, that means its trading value has absolutely no ground to stand on.
Some will argue that the rise in its trading value is a simple matter of supply and demand. Sure, that is true, but it’s only a partial truth and is merely scratching the surface. What we’re conveniently blinding ourselves from is the reason behind the seemingly unreasonable demand, especially given the fact that the cryptocurrency is hardly usable these days. Primarily, the reason behind such high demand for BTC these days is because of the potential for its value to fluctuate. But at this point, its price is so high for no legitimate reason other than, let’s face it, FOMO (apart from some pump-and-dump conspiracy theories).
The holders profiting from its value increase will continue to do so for as long as more people feed more money into the cryptocurrency by buying them in exchanges. But without actual value to back it up, then it acts quite like a Ponzi.
In a Ponzi scheme, early investors are handed “returns” which are generated by gaining new investors. There is no actual legitimate business behind it, just a mere handing off of money from one person to another. If Bitcoin fails to deliver its promises as a system, then its trading value will seemingly turn out to be merely an automated, decentralized Ponzi scheme.
Therefore, the answer to whether Bitcoin is a Ponzi or not is actually conditional:
Unless Bitcoin fulfills its promises, critics are right: it is a Ponzi.
The only way it can break away from this label is for it to fulfill its promised use case. So until it does, unfortunately, the value of your holdings is backed by nothing but speculation and FOMO. And when that bubble bursts, you are in for a lot of pain. With BTC shooting so far as $11,000, it’s going to be one long and hard drop—the higher the rise, the harder the fall.
Any cryptocoin that has nothing to offer other than the possibility to make profits when its value rises is also a pump-and-dump scheme waiting to happen. Sure, you can still make money off of it for as long as people keep buying in and inflating your holdings. But much like a Ponzi or a pyramid scheme, this is bound to collapse at some point. All it takes is a change in market behaviour—whether it’s a simple drop in intrigue, a fear of an impending crash, or a switch in favour of competing tokens.
If a domino effect ensues, then those who cash out in time minimize their losses, while the rest will be left holding the bag.
A bitcoin is forever?
If Bitcoin fails its promises, it’s not digital gold. It’s digital diamond.
Mass adoption is crucial to the success or demise of a blockchain. But then, why would anyone take the time and painstaking effort to understand a new payment method that is at the same time, more expensive and frustratingly slower than the good old credit cards and fiat they’ve been using for decades?
It doesn’t matter that there will only be 21 million of them. This notion of scarcity can only keep HODLers in to some extent. Ultimately, it wouldn’t matter if it becomes useless.
Some argue that BTC could serve well as a store of value, instead of the peer-to-peer electronic cash it was originally intended to be—which is what Bitcoin Cash intends to carry on with. But then how will a system be a good store of value if it has no utility. Even with this value proposal, they are standing on shaky ground.
As a store of value, the same price fluctuations that reel in profit-seeking buyers makes cryptocurrencies an unreliable, speculative asset at best. And with no solid utility, at some point, people will realize that it is useless—unless they can pull off an elaborate hoopla of De Beers magnitudes and keep it going indefinitely. Perhaps one day, you can get a woman to say “yes” with a Nano ledger or a Trezor, but would she check the balance first? It could turn out to be a very awkward proposal. But needless to say, I doubt this is a bet anyone’s willing to make.
Speaking of diamonds, if Bitcoin fails to deliver the purposes it was made for from the very beginning, then it is not digital gold. It’s digital diamond. It’s only valuable because we think (and insist) it is.
“Diamonds are intrinsically worthless, except for the deep psychological need they fill.” –Nicky Oppenheimer, former De Beers chairman, 1999.