Bitcoin is not a ponzi scheme, pyramid, tulip bulb, or beanie baby, and despite over a hundred front page headlines claiming otherwise, it is also not dead. When we don’t understand a new concept, our minds try to connect it to something we are even slightly more familiar with. If throughout history we had always assumed anything new and innovative was a scam, and that everything (including money) should stay the same, we would still be living in the Stone Age and paying with pebbles. The name calling and proclamations of death have eased off somewhat, as the more tech savvy journalists and financial advisers have come to understand the significance of, at the very least, the technology behind bitcoin.
It may be cryptocurrency’s dual role as a payment method and an appreciating asset that has people dumbfounded. Having never witnessed a currency do anything but lose value over time, it can be difficult to wrap your head around one that doesn’t. Yes money should be stable, have predictable purchasing power, be a store of value, and so on and so on… Try telling that to the people of Venezuela, where bitcoin is providing the country with the currency stability that government issued fiat failed to deliver.
Perhaps it was premature to call it money when the definition is too rigid for the many functions of a technology based currency that is just getting started. Every day brings new innovation within the industry, and any problems can be solved if we give the technology room to grow.
Just because there were early adopters and investors that ‘struck it rich’, doesn’t make bitcoin a ponzi. Early investments in any type of successful groundbreaking innovation is capable of delivering spectacular returns. It is quite common for early investors in any organization to hold a significant stake, and in the protection and promotion of their self-interests, risks are reduced and the chance of success is increased. Perhaps the ponzi comments are nothing more than sour grapes from someone who wasn’t early to the bitcoin boom.
Any digital currency can, just as any fiat currency can, be used as the payment method in an illegal scheme or con. That doesn’t make the U.S. dollar a beanie baby, or the Canadian dollar a tulip bulb. There are some bad actors that have used cryptocurrencies to run recruiting based pyramid schemes, or created them solely to scam new investors through a planned pump and dump. These are crimes of the person, not crimes of the currency. The pyramids are easy to spot as they actually display the warning characteristics of one, but unfortunately investors only find out they have been duped by a pump and dump after the fact. While the bad news tends to get more ‘airtime’, we need to keep in mind there are also some amazing cryptocurrency projects (being worked on by reputable teams) that will help bring credibility to the industry.
Not only is there a great deal of bitcoin misinformation circulating, there also seems to be a great deal of misinformation on what constitutes ponzis and other scams. Here is a brief refresher on what they are and what they aren’t:
A ponzi scheme is a form of investment fraud in which the operator pays early investors their promised ‘returns’ from the fund contributions of new investors. There is no actual investment, but Ponzi promoters are masters of the sales pitch, and have no trouble finding participants that are willing to part with their money.
If bitcoin was a ponzi scheme, Mr Bitcoin would be paying out some form of high investment return to current holders from the funds of new investors. Bitcoin is a decentralized global currency that is mined, bought, and sold all over the world. With its open and permanent ledger, transactions have nowhere to hide. It doesn’t have the capacity to recruit investors with the promise of unrealistic returns and no risk – only people can do that.
Ponzi scheme warning signs according to the SEC:
- High investment returns with little or no risk. Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any “guaranteed” investment opportunity.
- Overly consistent returns. Investment values tend to go up and down over time, especially those offering potentially high returns. Be suspect of an investment that continues to generate regular, positive returns regardless of overall market conditions.
- Unregistered investments. Ponzi schemes typically involve investments that have not been registered with the SEC or with state regulators. Registration is important because it provides investors with access to key information about the company’s management, products, services, and finances.
- Unlicensed sellers. Federal and state securities laws require investment professionals and their firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.
- Secretive and/or complex strategies. Avoiding investments you do not understand, or for which you cannot get complete information, is a good rule of thumb.
- Issues with paperwork. Do not accept excuses regarding why you cannot review information about an investment in writing. Also, account statement errors and inconsistencies may be signs that funds are not being invested as promised.
- Difficulty receiving payments. Be suspicious if you do not receive a payment or have difficulty cashing out your investment. Keep in mind that Ponzi scheme promoters routinely encourage participants to “roll over” investments and sometimes promise returns offering even higher returns on the amount rolled over.
The characteristics of a Pyramid Scheme according to the SEC:
- Emphasis on recruiting. If a program primarily focuses on recruiting others to join the program for a fee, it is likely a pyramid scheme. Be skeptical if you will receive more compensation for recruiting others than for product sales.
- No genuine product or service. MLM programs involve selling a genuine product or service to people who are not in the program. Exercise caution if there is no underlying product or service being sold to others, or if what is being sold is speculative or appears inappropriately priced.
- Promises of high returns in a short time period. Be leery of pitches for exponential returns and “get rich quick” claims. High returns and fast cash in an MLM program may suggest that commissions are being paid out of money from new recruits rather than revenue generated by product sales.
- Easy money or passive income. Be wary if you are offered compensation in exchange for little work such as making payments, recruiting others, and placing advertisements.
- No demonstrated revenue from retail sales. Ask to see documents, such as financial statements audited by a certified public accountant (CPA), showing that the MLM company generates revenue from selling its products or services to people outside the program.
- Buy-in required. The goal of an MLM program is to sell products. Be careful if you are required to pay a buy-in to participate in the program, even if the buy-in is a nominal one-time or recurring fee (e.g., $10 or $10/month).
- Complex commission structure. Be concerned unless commissions are based on products or services that you or your recruits sell to people outside the program. If you do not understand how you will be compensated, be cautious.
Bubbles occur when irrational investors get caught up in market euphoria. All logic is thrown to the wind as they keep buying a particular over-valued asset, believing that its price will continue to rise. Unfortunately, the only way to confirm that an asset is over-inflated and in the midst of a bubble, is after it bursts.
Many people believe that cryptocurrencies are in the midst of a bubble. There is rampant speculation, particularly in the altcoin market, with very little backing a good portion of the lofty valuations. There are some great investment opportunities in select currencies, and it may take popping the bubble of those that never really stood a chance, to find the ones that do.
Tulip Bulb Mania: Holland 1634 – 1637
Dutch passion for tulips and a color altering virus the plants had contracted, led to one of the most irrational, speculative bubbles of all time. Flames of color on the petals caused by the virus, resulted in a wide selection of unique color variations. Speculative demand for the already popular tulip exploded, and continued to grow at an irrational rate until the value of a single rare bulb exceeded the cost of a house. When people began selling to take their profits, the falling price created a panic in the tulip market. Dropping prices spooked buyers, and the market descended into a free-fall, losing 99% of its value within months. People that had cashed in their life savings or sold their homes just to buy into tulip mania, were left with nothing.
Beanie Babies Bubble: 1994 – 1999
I’m not really sure why anyone would associate bitcoin with Beanie Babies, so this section is simply a clarification of what cryptocurrency is not. In order to have any similarity to Beanie Babies, the bitcoin supply (including how much is mined and sold on the market) would have to be controlled by one person or entity. The ongoing difficulties within the global bitcoin community when trying to reach a consensus on any proposed and/or needed changes, is all the proof one needs that it is not operated as a one-man show.
In 1993, Ty Warner introduced a new line of plush animals filled with PVC pellet ‘beans’, at the World Toy Fair. Even though these Beanie Babies were mass produced, they were marketed in a manner that limited avai lable supply. Restricting retail sales to specialty toy stores only, limiting the quantity produced of each new Beanie Baby, limiting the amount of each design that a retailer could order, and retiring particular models, all set the stage for a huge collectable bubble. At its height, some of the rare Beanie Babies sold for $5,000. By 2000 it was all but over, leaving a lot of people holding a bag of worthless Beanies.