Bitcoin looks like a Ponzi scheme and quacks like a Ponzi scheme

It’s not even money

For the nitpickers who are arguing whether it’s a Ponzi scheme or not. It doesn’t matter. I was educated as an Economist, and if it looks like a Ponzi scheme and quacks like a Ponzi scheme, then it is a Ponzi scheme. But if it makes you happier, call it The Greater Fool Theory of Investing.

Cryptocurrency [crypto] has the illusion of being an investment, but it’s not. An investment has an underlying value. Tesla may have had an overhyped stock price, but it has an underlying value as a company producing as many cars as it can to meet demand. The US dollar is a true currency, because its value is maintained by the US government. Cryptocurrencies have no underlying value.

@luayrahil argues at length why it is a Ponzi scheme in Crypto: The World’s Greatest Scam. This article discusses the reasons crypto does not meet the economic definitions of currency.

The collapse of crypto in 2022 occurred, because people wanted to cash in to buy real stuff and pay bills. They couldn’t, with cryptocurrencies, because there was nothing behind them except faith. Nothing at all. You can’t even get back the electricity that was used to mine one. You can’t plug a Bitcoin into your meter and keep the lights on for a few hours.

If you don’t believe me or Luay, here’s what Warren Buffett has to say (source):

Cryptocurrencies basically have no value and they don’t produce anything. They don’t reproduce, they can’t mail you a check, they can’t do anything, and what you hope is that somebody else comes along and pays you more money for them later on, but then that person’s got the problem. In terms of value: zero. — CNBC, February 2020

Bitcoin has been used to move around a fair amount of money illegally. The logical move from the introduction of bitcoin is to go short suitcases because the money that was taken in suitcases from one country to another — suitcases will probably fall off in demand. You can look at that as the economic contribution of bitcoin to the society.”— CNBC, February 2020

As quoted in Market Insider

Inflation is no indication that the dollar is a scheme. If you drill down deep enough, every dollar is guaranteed and backed by the US government. Individual banks do create money out of thin air, using far less electricity than Bitcoin, but they are highly regulated. If a bank fails, the FDIC makes sure most depositors come out whole. The Feds make sure the failing bank is absorbed by a prosperous one. The bank rescues after the collapse of 2008 is evidence of that.

Who made sure the crypto owners were made whole in the aftermath of the 2020 collapse? Musk played games, but most companies stayed away. And why…

Cryptocurrencies are not money.

Wampum isn’t either, but that’s a story for another to tell.

Money is fungible, meaning a real currency can be turned into things and things turned into money without an intermediary. You can buy a lawnmower with cash or a credit card and turn around and sell it for cash or a check (if you trust them). Surprising, Googled descriptions of money skate around the idea of fungible. Medium of exchange kind of captures it. Crypto fails because the guarantee of exchange is not there.

Legal tender (legal money) is money supported by the government. Most importantly, it can be used to pay taxes. If you can’t use it to pay your taxes, it isn’t money. Everyone is required to accept legal tender in payment of debts. You are going to get your tax refund in dollars, even if you ask for crypto. Crypto fail, even in El Salvador.

Acceptance. Legal tender is not money if no one accepts it. That’s the case in Ecuador now. Bitcoin is legal tender, but most people still use the US dollar. Crypto fail.

Durability means it keeps its value over time and does arbitrarily lose its value. The confederate dollar turned out not to be durable. The Italian lira was. No matter how many zeros were thrown in, the underlying value was eventually convertible into euros. The escalation in the value of cryptos and the following crash does not indicate durability. If the dollar did that, even liberals would be marching on Washington with arms. Crypto fail.

Uniformity insures that $10 spent in Alabama can be paid by a $10 bill from California. Anyone who has made purchases from Europe can appreciate uniformity. Uniformity means that accounting is done in dollars, debts in dollars, pay in dollars, and assets in dollars. Imagine if your taxes were in dollars, but your pay was in turnips. Crypto fail.

Crypto still doesn’t make the grade because it is not regulated. Money is created by your local bank (fiat currency) but the bank is regulated by your District Federal Reserve Bank, one of 12 district banks. The central Federal Reserve Banks, which sets monetary policies and such things as the interest rate. The FDIC measures the actions and performance of local banks. BAD banks get put into forced mergers with GOOD banks. To clarify, GOOD and BAD are not ethical or moral values. A bank can become BAD by being morally good, but it is rare.

Cryptos have no regulation at all. No protection at all. If it goes belly up, there is no life raft. (Crafting metaphors from clichés, is a fine art; I assure you.)

Bitcoin was set up to enable a criminal enterprise from the beginning. Why would you want to keep transactions secret, unless you were doing something nefarious like money laundering or keeping your porn subscriptions secret from your wife? A person buying a house or a farmer buying a tractor wants the transaction available for inspection and verification, so they can put it on their taxes or add it to their assets to improve their credit rating.

I know, crypto-fans can think of all kinds of reasons that were thought of by lawyers in the Caribbean islands decades ago. May there is a career opportunity in upgrading them.

Conclusion

Cryptocurrencies are not currency. They are not even money. They are only a well-designed Greater Fool fraud scheme.

Bitcoin was ingenious in its design that made a practical solution to a number of internet hazards. The whole enterprise appealed to software developers and libertarians. Both groups want to get rich by sticking it to the man. Software developers have pretty loose morals when it comes to making and keeping money, and shouting about every shiny thing as you can tell on Medium. And Blockchain itself is pretty cool, but not earthshaking.

The fact that Satoshi kept his identity secret should have been a red flag to anyone.

That’s why the cryptos were successful, and why the software developers and libertarians will get burned.

I’ll have to ask my son-in-law what he thinks. He’ll probably tell me that he agrees with the rest of you.

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