Bitcoin: Why it isn’t a Ponzi Scheme
When people encounter something new or something that they don’t understand, there is often mistrust and a need to tie this new thing to something familiar. Bitcoin is undoubtedly no exception.
One familiar concept that Bitcoin often wrongly gets equated with is a Ponzi scheme.
What is a Ponzi Scheme?
Let’s first look at what precisely a Ponzi scheme is and how Bitcoin cannot possibly be one.
A common variation of a Ponzi scheme involves a person posing as a portfolio manager taking funds from investors and passing these funds off as profit or income to pay back earlier investors. This portfolio manager also ensures that they allocate themselves a significant portion of the investment coming in. This type of fraudulent investment management service involves the portfolio manager manipulating the entire set-up for their own gain. Ponzi schemes only work as long as new investors are adding money, which used to pay back previous investors creating the illusion that they are making a profit.
For new investors to be willing to continue contributing money, a Ponzi scheme must fulfill certain criteria.
First, there must be a level of secrecy. Investors expect the portfolio manager to allocate investments into various profit-yielding activities. Given that this is not actually happening, there must be an element of obscurity to hide where funds are going or where “profits” are coming from.
How is Bitcoin not a Ponzi Scheme?
This is simply incompatible with Bitcoin. The blockchain is entirely transparent; anyone, at any time, can inspect the public ledger to see how much Bitcoin is moving and where.
Second, Ponzi schemes must have a level of complexity to obfuscate transactions not only from investors but also from regulators. In other words, such projects hide behind complicated financial procedures and accounts. Bitcoin, on the other hand, requires minimal computer skills and is generally accessible by everyone. Bitcoin can be easily purchased with fiat or traded for another cryptocurrency. Once an order goes through, the buyer is now invested in Bitcoin. Users buy and sell at prices set by the crypto market rather than arbitrary numbers created by a criminal mastermind.
Lastly, Ponzi schemes often return suspiciously consistent returns to initial investors. Those who fall victim to these schemes do so because they are seemingly receiving a steady profit on what they have put in, and why would anyone question money coming in. However, this is not the case with Bitcoin. The volatility of the market means that if as a day trader, it is just as possible to lose or win any amount at any time. Based on Bitcoin’s history, consistent returns are only likely after 4-year periods or longer, a much more reasonable sign of a solid investment and less so of a get rich quick scheme.
That being said, just because Bitcoin itself isn’t a Ponzi scheme, it doesn’t mean that there aren’t malicious people out there wanting to take advantage of those trying to get into Bitcoin. To avoid falling for scams, it is always best to only trade on trusted platforms such as Phemex. There, you have more control of your funds and can see where and how your Bitcoin is moving.