What is a Ponzi Scheme?
A Ponzi scheme is a form of investment fraud where the operator makes profit for older investors by using the funds paid by new investors, rather than from legitimate business activities.
Operators of Ponzi schemes are either individuals or corporations that lure in new investors by promising short-term returns that are either oddly high or unusually consistent.
Companies that use Ponzi schemes concentrate all of their energy into bringing in new clients to put in the investments and be able to maintain for as long as possible the illusion of a sustainable business. Ponzi schemes need a constant stream of new investments to supply the returns of older investors. When the number decreases, the scheme doesn’t produce any investments and it falls apart.
Ponzi schemes are also known as pyramid schemes and the common features of both these schemes are higher returns than the average market, recruiting new members under the scheme and requesting money from them in some form.
These are the main characteristics of a typical Ponzi scheme, whether it is from the crypto space or other industries.
- They promise unfeasibly high returns.
- They promise regular or monthly returns usually.
- They require members to bring in new members.
- Founders run off with a substantial amount of the investors’ money.
What is Bitcoin?
Bitcoin is the world’s first cryptocurrency launched in 2009 by an anonymous software developer which goes under the pseudonym of Satoshi Nakamoto. It was designed to serve as a form of electronic cash which uses mathematical validation.
The idea was to create a means of exchange that did not require any central exchange to manage it, which could be transferred electronically in a secure and verifiable manner.
Bitcoin has been criticized for being used in illegal transactions, having a mining process that involves high electricity consumption, and the possibility of being an economic bubble or a Ponzi scheme.
Why Bitcoin is Not a Ponzi Scheme
As we explained what Bitcoin and Ponzi schemes are, we can continue our argument as to why Bitcoin is not one:
Bitcoin does not require anyone to put their money in
Bitcoin’s whitepaper does not stipulate anything regarding the buying/selling Bitcoins and neither does it try to attract investors to put their money. The 8-page document presents a software solution for creating form of digital money which is censor-resistant.
The founder never made away with a big part of the money
Bitcoin’s founder, Satoshi Nakamoto never ran away with a large majority of the Bitcoins. While it is true that he held for himself millions of Bitcoins, they were never stolen from anybody or just created out of thin air.
In order to receive the block rewards to get new Bitcoins he had to run a full node and mine Bitcoin blocks, which is a legal practice that miners use even today on many blockchains of this type.
It is also worth noting that the Bitcoins he mined at that time and reserved for himself had practically no value.
Bitcoin never requested you to recruit new people/investors under it
Neither Satoshi or his whitepaper or even early Bitcoin holders attempted to recruit new people/investors for Bitcoin.
In the early days, mostly dedicated tech enthusiasts used to mine and use Bitcoin, and most of them used to spend it on buying pizzas or just used them to exchange for other services.
No monthly/regular returns were promised or given
Bitcoin’s current working model does not stipulate nor promise any returns or regular returns either. It is another matter that investors have made profits due to the huge rise in the price of Bitcoin experienced over the years, but that was generated by the law of demand and supply which thrived in a free market.
On the other hand, many investors also lost money as Bitcoin price can fall just as fast as it rose.
It is not controlled by a person/company
The concept on which Bitcoin is based uses the blockchain and a proof of work protocol, which is decentralized and censorship-resistant technology which ensures that no particular entity is in-charge of the network and how the rewards are made or distributed.
All of the generation and distribution process of Bitcoin is managed by the software developed in 2008. As no one is actually running Bitcoin, no one disappear with people’s money or Bitcoin.
While there are many cryptocurrency Ponzi schemes and pyramid schemes in the crypto space (e.g. Bitconnect), that doesn’t make Bitcoin and other cryptos automatically Ponzi schemes.
The cryptocurrency market will continue to be plagued by such schemes because it is based on a decentralized technology -which is hard to regulate- and this will result in the creation of more Ponzi schemes.