I hereby make a prediction: Bitcoins will go down in history as the most spectacular private Ponzi scheme in history. It will dwarf anything dreamed of by Bernard Madoff. (It will never rival Social Security, however.)
To explain my position, I must do two things. First, I will describe the economics of every Ponzi scheme. Second, I will explain the Austrian school of economics’ theory of the origin of money. My analysis is strictly economic. As far as I know, it is a legal scheme — and should be.
PONZI ECONOMICS
First, someone who no one has ever heard of before announces that he has discovered a way to make money. In the case of Bitcoins, the claim claim is literal. The creator literally made what he says is money, or will be money. He made this money out of digits. He made it out of nothing. Think “Federal Reserve wanna-be.”
Second, the individual claims that a particular market provides unexploited arbitrage opportunities. Something is selling too low. If you buy into the program now, the person running the scheme will be able to sell it high on your behalf. So, you will take advantage of the arbitrage opportunity.
Today, with high-speed trading, arbitrage opportunities last only for a few milliseconds seconds in widely traded markets. Arbitrage opportunities in the commodity futures market last for very short periods. But in the most leveraged and sophisticated of all the futures markets, namely, the currency futures markets, arbitrage opportunities last for so brief a period of time that only high-speed computer programs can take advantage of them.
The individual who sells the Ponzi scheme makes money by siphoning off a large share of the money coming in. In other words, he does not make the investment. But Bitcoins are unique. The money was siphoned off from the beginning. Somebody owned a good percentage of the original digits. Then, by telling his story, this individual created demand for all of the digits. The dollar-value of his share of the Bitcoins appreciates with the other digits.
This strategy was described a generation ago by George Goodman, who wrote under the pseudonym of Adam Smith. You can find it in his book, Supermoney. This is done with financial corporations when individuals create a new business, retain a large share of the shares, and then sell the stock to the public. In this sense, Bitcoins is not a Ponzi scheme. It is simply a supermoney scheme.
The Ponzi aspect of it comes when we look at the justification for Bitcoins. They were sold on the basis that Bitcoins will be an alternative currency. In other words, this will be the money of the future.
The coins will never be the money of the future. This is my main argument.
THE AUSTRIAN SCHOOL’S THEORY OF MONEY’S ORIGINS
The best definition of money was first offered by Austrian economist Carl Menger in 1892. He said that money is the most marketable commodity. This definition was picked up by his disciple, Ludwig von Mises, who presented it in his book, The Theory of Money and Credit, published in 1912.
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I knew it was a scam from the start.
The first biggest Ponzi Scheme in history is the obama/regime, and the second biggest Ponzi Scheme is the obamacare Act!
A currency driven by the market and not some government is what we need!
The only currency I trust is solid gold and silver I can hold in my hand.
The article loses all credibility because the author doesn't even know what a ponzi scheme is. Bitcoin is NOT a ponzi scheme. It may be a scam, it may be a bad investment idea, it may never do what it was supposed to do in the first place but it is not a ponzi scheme by definition.
You lost me at “Social Security”, because anyone with half a brain knows Social Security isn’t a Ponzi scheme. Bitcoin will fail, yes, but not for these reasons.
The biggest ponzi, fraud, treasonous, scheme perpetrated on America are, that Barack Hussaine Obama is an American Citizen and qualified to be President of the United States, the second is the Federal Reserve and the destruction of the Gold standard,the third is Obamacare and it's use in changing America to a Fascist state.
It is true that gold and silver have intrinsic value. That is all that separates them from bitcoins. As long as there are dollars they will be the accepted currency of trade. You would be hard put to pay your register tab at the Walmart with either gold, silver, or bitcoins. For gold or silver to have cash value it must be traded for dollars or euros or an accepted currency. I doubt that you will ever see bitcoin traders. See my blog at http://cranky-conservative.blogspot.com
Shane, use your brain's other half, next time.
I first heard of these ''bit coins'' from glen beck, he was promoting it big time, but after a while he was silent on the subject, for obvious reasons. these bit coins are not and were not widely accepted by anyone nor hardly any retailers on or offline. these are bogus and when you trade actual real money for this junk who really wins? that's right the con man out there selling it.
It's not a Ponzi scheme. It's a BUBBLE, plain and simple.
north says bitcoins are not money, but dollars are– wrong, according to Aristotles definition…1.) It must be durable..2.) It must be portable. 3.) It must be divisible. 4.) It must have intrinsic value. dollars fail #1 and 4
I agree north is also wrong with using the term Ponzi scheme,, they are not taking from peter to pay paul, they are hyping a story, and people are buying the story and perhaps overpricing it or perhaps not. they say that the number of bitcoins will be limited, id like to know how we can SUFFICIENTLY hold them to that and monitor it. so maybe not a scam, but perhaps a bubble, and maybe it will turn scam down the line…things change. i dont trust it
Just what do you think a Ponzi scheme is then, if you don't think SS is one?
It's pump and dump! Same as a stock! Pump it up , sell it to the sucker for big american bucks, and when it is worthless buy enough of bit coins to pay your debts(thats what they are expecting payment in, and wallah! You haven't broken any laws, just morality laws. Remember the tulips!
It's not a Ponzi Scheme. You can even mine Bitcoin yourself (with a powerful enough ASIC: http://en.wikipedia.org/…/Application-specific….
When you mine Bitcoin, what you're doing is creating Bitcoin. In order to mine, your computer is solving math problems which creates a secure Bitcoin (which is why you can't just "copy and paste" yourself rich).
The issue is that the more people mine, the higher the "difficulty" becomes (difficulty is how difficult the math problems are). And the higher the difficulty becomes the more powerful you need your computer hardware to be. There are online calculators that help you to figure out how much electricity you will be using, how much your hardware was, and how high the difficulty is… and then it lets you know if you can make a profit, and how much.
NOBODY is at the top of this so-called "Ponzi Scheme". What Bitcoin is doing is bringing back the traditional barter system. Businesses are seeing Bitcoin as valuable (just as societies always saw gold and silver as valuable), and are taking Bitcoin as payment.
"I'll trade you my t-shirt if you trade me your Bitcoin."
"anyone with half a brain knows Social Security isn't a Ponzi scheme."
Anyone with half a brain is intellectually crippled, so it is not surprising Shane that you don't think Social Security is a Ponzi scheme.
But it is a Ponzi scheme Shane, and it will collapse like they all do.
I dispute that gold and silver have inherent value. I submit that their PRIMARY value is as a currency. As such they DERIVE their value from their acceptance as payment for things people actually want. Food, fool, shelter, and the resources to produce the above have inherent value. Anything I don't want for its own sake doesn't have inherent value. It only DERIVES its value from being accepted in exchange for items wanted in their own right.
Please supply YOUR definition of a Ponzi scheme. You can't claim something is BY DEFINITION, not a Ponzi scheme without supplying a definition.
Actually, Ponzi STOLE the idea from social security.
I think the jury is still out with regards to Bitcoin. If it gains general acceptance as a currency, then it can succeed. If it is limited to purchase by people anticipating an increase in value without being used as a currency, then yes, it will ultimately fail.
Wouldn't the simple word "fraud" pretty much fit the bill?
???
Bitcoin looks, feels, smells and tastes like a scam or a ponzi scheme by those who don't understand how it works. Almost no one trusted the Internet when it first came on the scene. We didn't want to give up our personal details or credit card numbers for fear of being scammed by some guy in Nigeria or worse. It was actually the Nobel Prize winning economist Paul Krugman who said commerce on the Internet would never take off. He was so very wrong. Experts are wrong all the time but where they are mostly wrong is when they draw conclusions about subjects outside of their expertise. BITCOIN IS A TECHNOLOGY! Its not about economic theory anymore than the Internet was. Listen to economists at your own peril but you will once again discover over time that they were wrong.
Well put Sarah
100 % CORRECT ITS A BIG FRAUD ON AMERICA
I'm not a fan of BTC. I don't own any and have no plans to do so in the future. Because I'll take 6000 years of history which the shiny stuff has, over BTC, any day. That said, I have a question. Which of your arguments against Bitcoin cannot be equally well used against gold and silver, at least in the West? It's not used as money here. You can't walk into a pizza parlor and pay with silver. You can't go into a car dealership and drop a sack of gold for a vehicle. They won't accept it. The price of silver in USD varies from day to day. People buy it not for its purchasing power, ie to be able to exchange it for something else, but strictly as a speculative investment. It's purchasing power is the same as BTC: zero, except in a niche environment.
You say that silver has inherent value because it's used as jewelry, and has industrial uses, and BTC doesn't? True, true. But, as you know, value is always in the mind of the user/consumer. Maybe the inherent value of BTC is its ability to buy the user items on black markets like Silk Road? Or how about anonymity, could that serve as "inherent value"? Can silver provide its holder with the ability to buy pot on the internet anonymously? Not as easily.
If I recall my "What has government done to our money" by Rothbard correctly, he said that anything can be money. Even a promise can be money. The only requirement is that it be accepted in trade not for its own sake, but as a token to be used in another exchange. It's true that some money is better than other money. But even bad money is still money. And BTC seems to have all necessarily qualities to be good money.
Gold and sliver don't have a "intrinsic value". Aluminium was as precious metal as pricey as silver so anyone who in the 19th century bought aluminium ingots thinking it will hold its value over time lost out big time.
I regarded Gary as one of the best writers around, but after reading such nonsense and inaccuracy in this article he tumbled down 100 positions in just one coup.
Gary, I can't understand: before judging something so complex and awesome as Bitcoin, please make your homeworks, so at least you can avoid stating such complete idiocy.
For example, you didn't know that Bitcoins are divisible, but hey, it takes 5 minutes to learn that…
The thing is that Bitcoins are actually being used to exchange goods. While I agree that the rise in price is a lot of speculation, there has recently been a dramatic increase in use in China which triggered the increase in price. I don't see Bitcoin failing except by technical failures or by regulations (in which case it would only have reduced use in the countries which regulate it heavily, like the US).
I have tremendous respect for Gary as an economist; I learned a lot of what I know from him. But in this case I don't think he fully grasps the developments in Bitcoin or how it works.
As a businessman over the years. I often encountered Barter Clubs, where you used trade dollars. Knowing they were weak in longevity as most start-up businesses are, I aggressively accepted trade dollars, but I also, even more aggressively spent trade dollars. In every case, these programs crashed and burned as predicted and I always ended up ahead of the game.
What I could never quite understand were those who held very large positions in trade dollars as if they were a bank account. I have seen many lose very big amounts doing so. The draw here that has given it legs, is these "dollars" are reportedly gaining in value or exchange, thus giving an even larger allure to hold them. Than cannot end well. As an avid stock trader I can tell you holding any stock forever will result in a loss. You have to take your profits, as I say, early and often as I am sure these bitcoin founders are. There is a reason they wanted to remain unknown by the masses.
If the market chooses and sustains it, then the Ponzi scheme analysis is irrelevant.
It's only a Ponzi scheme if confidence is lost and it collapses.
Interesting distinction, eh?
Dear Gary,
This essay is a great disappointment to me who does read your articles. what you say about bitcoins can also be very true of existing currencies!
It is a bad investment i wouldnt touch it.
The first biggest Ponzi Scheme is Social Security.
Both gold and silver have intrinsic value. There are industrial uses for both, and especially silver.
Conversely, BitCoin has no intrinsic value, never existed as a commodity, and has no use outside of a method of facilitating secret trades (a currency).
Ponzi Schemes require new investors at ever-increasing numbers to maintain the illusion of solvency. If that doesn't describe BitCoin, I don't know what does…
Lol, could very well be true!
It's durable tulips. No more, no less.
Sure, more can be mined. Yes, they're durable, portable, divisible. But BitCoins have no use outside of being a medium of exchange. It is a poor money substitute, exactly like the fiat US dollar, only lacking the full force of the US government.
Economists who actually apply correct economic theorem predict pretty well the trends, just not the timing.
In this case, North is right. BtC did not begin as a commodity. It is expressly created to be a currency, with scarcity, durability, divisibility, and interchangeability all built into the design. But it lacks the pre-existing confidence of a commodity money. It is no more stable than the US dollar, and lacks the backing of the US government to boot.
Can you make some money off BtC? Of course. But you have to know when to get in, and when to get out, and few will do it successfully.
It will prove easier and more efficient to buy and hold gold and silver over time than BtC. When BtC collapses, its value will evaporate. You'll hold nothing, because it is intangible, just like paper money. It is fiat, based 100% on confidence, representing nothing.
At least with gold and silver, somebody, somewhere, will use it for an industrial purpose.
I don't buy silver (or gold) as an investment. I buy it to protect me from inflation, hyperinflation, and currency collapse.
The real question is, if BtC collapses, what will you have left over? What is tangible about BtC? Or the US Dollar, for that matter? Nothing.
Your original statement of 6000 years of history is correct.
BtC are fiat, just like the US Dollar. North doesn't have faith in that currency, either.
I agree that the biggest threat to BtC is government. Specifically, government's seeking to protect their monopoly on currency.
That being said, understand that BtC is a fiat currency. It is an imaginary instrument that only has subjective value based on how accepted it is in trade. There is no intrinsic value, as there is no physical, tangible object.
Which is why North hoards gold and silver.
Gary,
I've been reading your stuff since 1999. You make some great points and write well, but your predictions are often wrong. You are definitely wrong about bitcoins. Nobody knows what the future will bring, but these things have value, the idea is sound, and it won't collapse under its own weight. Unless govt finds out how to stop it, Bitcoin and friends will be around for a very long time.
"Here we see something sad and ironic: a man who hates the Fed, trying to ruin the one tool that can actually slay the Fed…Bitcoin is not important because its price is rising – it’s important because it takes the control of money away from the cartel. "
http://www.freemansperspective.com/gary-north-bit…
http://libertarianstandard.com/2013/12/01/ponzi-l…
It is a Ponzi scheme because the early disciples mined BItcoins very easily, so in a sense they had more for themselves from the very beginning.
You're changing the definition of a Ponzi scheme (which, by the way, I should point out that with Peer to Peer, there is nobody at the "top"). This should explain things better:
"Early and present adopters profit from the rise in value as Bitcoins become better understood and in turn demanded by the public at large. All adopters benefit from the usefulness of a reliable and widely-accepted decentralized peer-to-peer currency."
Shane, would you please quit with the liberal "I'm so much smarter than you" gambit. Gary could whip you intellectually without even trying. It would be like using a cannon on a fly instead of a flyswatter. So buzz off.