Bitcoin Is Not a Ponzi Scheme

This is a series about the history of money and the current financial system taken from my book (L)earn Bitcoin

Pt. 1 The evolution of money
Pt. 2 How money is created
Pt. 3 Central banks and inflation
Pt. 4 Bitcoin is not a Ponzi scheme
Pt. 5 Today’s Petrodollar System

Ponzi scheme: A form of fraud in which belief in the success of a fictive enterprise is fostered by payment of quick returns to first investors from money invested by others.” - Oxford English Dictionary

Bitcoin enemies call it a Ponzi scheme. I say, they either do not understand Bitcoin or what the real Ponzi system is, or they have a vested interest in Bitcoin not succeeding. Charles Ponzi was arrested in the US in 1920 for taking $20 million dollars from tens of thousands of victims. His promise was to double their money within three months. In return for cash, investors received promissory notes that guaranteed the original investment plus 50 percent interest. These notes bore Ponzi’s ink-stamped signature. Many referred to them as Ponzi notes”.

Charles Ponzi in 1920Charles Ponzi in 1920

My business was simple. It was the old game of robbing Peter to pay Paul. You would give me one hundred dollars and I would give you a note to pay you one-hundred-and-fifty dollars in three months…My notes became more valuable than American money…Then came trouble. The whole thing was broken.” - Charles Ponzi

If you want to know more, listen to my podcast episode about the life and story of Italian-born Charles Ponzi.

Characteristics of a Ponzi Scheme

  • A Ponzi scheme has a centralized actor, leader or organization that collects investments and runs off in the end.
  • Ponzi schemes are not auditable or transparent. Nobody except the creator knows what happens to the funds.
  • A Ponzi scheme issues money until it breaks - there is no supply limit.
  • Difficulty in repaying investors: the more money that flows into the scheme, the more money has to be paid back, and the more difficult it gets for the creator to stop the machine.
  • The system has to break one day, there is no way out.
  • The scammers earn money for lending out funds with no real contribution to the economic performance of a country.
  • Greed is driving the Ponzi scheme. Retail investors who get in early, earn interest and tell others, who also want to get rich quick.

Let’s compare these characteristics to today’s system of money creation.

Characteristics of Fiat Money Creation

  • Centralized actors like governments, central banks and commercial banks create money.
  • The monetary system is not auditable or transparent.
  • There is no money supply limit.
  • Difficulty in repaying investors: due to the fractional-reserve banking system, if only 20% of a banks customers where to request a payout at the same time the bank gets into trouble and will say no” to your withdrawal. This happens regularly around the world and happened to some US banks in early 2020 during the pandemic shutdown.
  • The system has to break one day, there is no way out.
  • Banks earn money for lending out funds with no real contribution to the economic performance of a country.
  • Greed is driving the fiat system. Financial elites receive cheap loans because they own securities to buy more securities and grow their wealth and power.

The Real Ponzi Scheme

  • The only similarity between Bitcoin and a Ponzi scheme is the network effect of greed. But unlike a Ponzi, you can hold the keys to your bitcoin yourself. There is no bank or centralized actor controlling your bitcoin.

  • Bitcoin has a limited supply. Only 21 million will ever be created. Bitcoin is finite, fiat currency is infinite. There can be no money supply based inflation in Bitcoin.

  • Bitcoin’s issuance is predetermined by an algorithm that all actors in Bitcoin have agreed upon and secure via operating nodes. It can not be altered without the consent of the global Bitcoin community. Since the 21 million bitcoin limit is one of the most important features of Bitcoin, an agreement for changing it will be very hard or even impossible to achieve.

  • Central bankers are determining the financial fate of all countries around the world. They are not elected, but they act as governments trying to control the entire financial market.

  • The Cantillon effect was described by Irish-French economist Richard Cantillon around 1730. He suggested that inflation occurs gradually and that the new supply of money created by the banks has a localised effect on inflation, rewarding the bankers and close actors by artificially creating money, benefiting those closest to the origin of money.

The Fed’s crisis and post-crisis monetary policies, adopted by other major central banks, was supposed to”trickle down” to the masses. That didn’t happen. The global elites knew this then, and they are more aware of it now. In January 2017, the World Economic Forum admitted that rising inequality threatens the world economy. These colluders provoke inequality because it benefits them and the preservation of their global power hierarchies to the detriment of everything and everyone else.” - Nomi Prins (Collusion, by Nomi Prins, Bold Type Books, 2019, p. 253.)

Next week, I’ll publish the final part of this series about the current financial system and why Bitcoin is a much needed alternative with an article about the Petrodollar.

This content is part of my (L)earn Bitcoin book available as paperback and ebook.

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