No, Bitcoin has nothing to do with a Ponzi scheme

Among the misconceptions circulating about Bitcoin , the idea that its price is driven by a Ponzi scheme is very common. In other words, the ever-increasing price of Bitcoin is supposedly explained simply by the buying and selling process. According to this logic, the price of Bitcoin depends on reselling it at an ever-increasing price to another person. This is also known as the " biggest fool theory ," which is frequently used by Bitcoin's detractors.

However, this is a very narrow vision that misses the fundamentals of bitcoin. Here is what you need to understand about Ponzi and understand how Bitcoin is very far from the practice of Ponzi.

What is a Ponzi scheme?

Ponzi schemes are financial frauds that use new investors' money to reward old investors. It is named after Charles Ponzi, an investment scammer from the 1920s. 

To deceive “investors”, the system offers investment returns to customers, although the deposited capital is not used in any way. You will better understand this form of scam with the following example.

Imagine that you are an early participant in a Ponzi scheme and you invest $800. This, in the hope of obtaining an annual return of 20%. In reality, these $800 would be used by the scammer to cover the interest on the so-called “investments” of those who came before you. 

He will then have to persuade other people to make additional investments in order to pay your “interest”. However, if new people don't join the network, the scam would eventually collapse and your $800 would be lost.

In the world of cryptocurrencies, the most common example is OneCoin , arguably the most notorious crypto Ponzi scheme. Fraudsters defrauded investors worldwide of over $4 billion. Following this, OneCoin's chief executive, Ruja Ignatova, disappeared and has never been found.

You should know that there are a lot of scams based on Ponzi schemes in the world of cryptocurrencies. This is explained by various factors including the fact that it is very easy to make promises about returns on investments, claiming that it is the new technology that will be used in the future.

How to recognize a Ponzi scheme?

Ponzi schemes often have common criteria. Here are also the signs and the "red flats" that should alert you.

1. A supposedly profitable investment

Every investment involves some level of risk, and risk is generally higher in investments that produce greater returns. An investment opportunity presented as “safe” should be viewed with extreme caution. 

2. Regular and frequent income

Everyone knows that over time, investments naturally go through up and down cycles. Therefore, one should always be wary of investments that consistently yield profits, regardless of general market conditions.

3. Unregistered investments

Ponzi schemes are usually investments that are not registered with countries with strong jurisdiction. In general, these types of companies register in tax havens in order to complicate customer complaints procedures. Worse still, many scams based on a Ponzi scheme also involve unlicensed personnel. A simple check would reveal their deception.

4. Difficulties withdrawing capital

If you are not receiving payments or having trouble withdrawing money, this is a very alarming sign. Promoters of Ponzi schemes sometimes try to dissuade participants from withdrawing their money by promising them even greater rewards if they maintain their capital. You can be sure that this is a great Ponzi scam.

Why Bitcoin is not a Ponzi scheme?

Any principle of fraud and scam goes completely against the development of bitcoin as a peer-to-peer open source currency.

Decentralization

By virtue of its decentralized nature, Bitcoin differs drastically from a Ponzi scheme which is managed by individuals or companies. No one controls Bitcoin and a whole set of actors make it possible. No person can benefit from Bitcoin in the same way as in a traditional business. Thus, the value of bitcoin is determined by its fundamentals and by the law of supply and demand. This makes it the opposite of a business, which is run by individuals and who dictate the price of their goods or services.

The blockchain

The blockchain gives bitcoin transparency of operations carried out on the network. Anyone, at any time, can view the public ledger to see where and how many bitcoins are being transferred. Therefore, there is no secret agenda, nor top executives who decide how to plan and increase their bitcoin profits. Besides, we cannot hide information. Everything is public and viewable by everyone.

However, opacity is specific to Ponzi schemes. These are often complex enough that transactions are hidden from regulators and investors. 

Read the article: What determines the price of Bitcoin (BTC) and other cryptocurrencies?

Price transparency

Bitcoin is easily exchangeable for other cryptocurrencies and can be purchased with fiat currency on any exchange platform . Its price is not fixed, and no one controls its fluctuations. The prices at which users buy and sell depend entirely on market sentiment.

Also, the Bitcoin market is constantly evolving. People trade for and against its value, send it to others as payment, and hold onto it over time. Besides Bitcoin, other network upgrades like the Lightning Network have been developed to address modern use cases. On the other hand, the value of a Ponzi scheme is not determined by the market, but by fictitious cash flows.

The risk

This is because the returns that initial investors receive from Ponzi schemes are risky. If you are not among the first investors, you risk losing your capital very quickly. People who fall into the trap do so because they believe they are making consistent returns on their investments. 

This is not the case with bitcoin. Due to market volatility, investors can make or lose money every day, just like in Forex. Therefore, bitcoin is radically opposed to the Ponzi pyramid, which, instead of promising you huge income, warns you of price volatility.

Of course, if you invest in bitcoin, it may lose its value over time. The same way as if you invest in real estate, for example. Your property may lose value but you still own your property. As long as you don't sell, you don't actually lose money. Likewise, you keep your bitcoins and your investment is still there. Your bitcoin is still worth one bitcoin.

Conclusion

If you hear someone tell you that bitcoin is based on a Ponzi scheme, you now know that this is just prejudice. It is important to clearly distinguish between what bitcoin is (a payment system) and other cryptocurrencies.

Indeed, many cryptocurrencies operate on a Ponzi scheme. While they aren't always easy to identify, this can be considered the case for many tokens resulting from yield farming or " meme coins " like Shiba Inu, for example. These tokens only gain value based on previous purchases by other investors. Without investor enthusiasm, these tokens have virtually no value.

If you are asked to buy cryptocurrencies, always do fundamental analysis and ask yourself the right questions about the origin of returns.