The highly volatile nature of bitcoin has caused many high-profile investors to tag the crypto asset as a “Ponzi Scheme.” The statement started gaining momentum after Dave Portnoy, the founder of the Barstool Sports blog-turned stock market day trader, started calling bitcoin a Ponzi Scheme on a public podcast. However, his statement was met with derision by most of the investors in the cryptocurrency community. In this article, let us find out what exactly a Ponzi Scheme refers to and how it works.
How Does a Ponzi Scheme Work?
A Ponzi Scheme is an investment fraud where the promoters make fake promises to the investors claiming to provide a very high return on their investments with little or no risk at all. These schemes aim to attract new clients to make investments, and then they gradually involve their friends, relatives, and colleagues. This way, the scammers begin to generate huge income from the new members. They use these investment inflows from new investors to pay out the old investors and keep the fake investment scheme up and running. The whole scheme stands out on a fake promise, and the funds never get invested in any assets or securities whatsoever. The scammers manipulate investors into thinking that they are making huge profits, but actually, they are losing money rapidly.
Therefore, to keep the Ponzi schemes running, there should be a consistent flow of money coming in, and the moment they fail to recruit more new investors, the bubble collapses.
How to Recognize Bitcoin Ponzi Schemes
Spotting out a bitcoin Ponzi Scheme is not that hard if investors keep their eyes wide open and are well aware of the cryptocurrency market’s happenings. Here are some signs discussed that are common red flags of a scheme being a bubble.
1) Too Good a Promise
A very common phase in the investment world that all investors have probably heard of is that ‘without risk, there is no reward”. Ponzi Schemes always entice investors by claiming to provide huge returns with no risk or a very little risk, which sounds too good to be true and might turn out to be fake.
2) Consistently High Performance
It is very common for the investment markets to rise and fall over time, and the returns in any reputable investment will have the effect of these market fluctuations. Therefore, investors should be very careful if any investment promises consistently positive returns regardless of the prevailing market conditions.
3) Unregulated Investments
Stay away from any unregulated investments as they are often signs of fraud. Ponzi Scheme promoters prefer investments that are not registered by the SEC (Securities and Exchange Commission) or other regulatory bodies because they help them to fly from under the radar and keep the fake scheme up and running.
4) Secretive Business Strategies
Crypto investments sound thrilling, but if the investment sounds complex and the recruiter cannot explain the business model well enough, stay away from such schemes.
Is Bitcoin a Ponzi Scheme?
A Ponzi Scheme structurally is like a bubble that does not have any productivity. Initially, all startups with ever-increasing valuations look like Ponzis but eventually, things begin to take over normalcy, but that takes time.
Bitcoin is not a Ponzi scheme, and here are the reasons why.
1) High Investment Returns
Ponzi Scheme generally promises high or consistent investment returns with no or very few risks, which sounds too good to be true. Generally, investments that yield high returns call for more risks; Bitcoin never promises high returns.
Ponzi Schemes rely on secrecy where previous investor outflows are paid back from new investor inflows rather than making money from the actual investment. With bitcoin, things are transparent; bitcoin being an open-source digital asset. As a distributed open-source software, bitcoin requires a majority consensus to change every code, and no central authority can change it. The nodes can be downloaded by anyone having an internet connection. It is immutable and self-verifiable and can only be moved with the private key associated with a certain bitcoin wallet address. Any user holding the private key can move his bitcoins without any central authority interfering.
3) Issues With Paperwork
A Ponzi Scheme always has some issues with the paperwork or investors finding it difficult to cash out money. Sometimes, account statement errors are a red flag that the funds are not invested as promised. Also, Ponzi Scheme promoters often prevent participants from cashing out by offering even higher returns for retaining them. Bitcoin being a distributed ledger, has never faced any such issues to date.
4) Unregistered Investments
There are hundreds and thousands of unregistered investments in a Ponzi Scheme. On the contrary, bitcoin has now been classed under registered assets, and any gains arriving from there are taxable under capital gains. So you should choose a platform like Bitcoin Evolution. Check out Bitcoin Evolution Review to know more about this innovative platform.
Thus, after comparing Bitcoin to systems that have Ponzi-like features, it is quite evident that the claim does not hold up. The bitcoin blockchain is transparent, public, auditable, verifiable, and analyzable. Individual firms can do analytics of the entire bitcoin blockchain to see which bitcoins are moving to and from various addresses. A full open-source node could be easily downloaded and run on a basic home computer and audit. Bitcoin’s entire money supply, which would otherwise not be possible if bitcoin was a Ponzi Scheme.